## 1. Principle-by-Principle Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation (_cr07168)

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### A. General
- Assessment covers the National Banking and Securities Commission (CNBV), other relevant regulatory agencies, and self-regulatory organizations (SRO).
- Update of an earlier assessment prepared in 2001; both were components of a Financial Sector Assessment Program (FSAP) by the IMF and the World Bank.
- Both assessments prepared by Mr. Jonathan Katz (consultant, formerly with the U.S. Securities and Exchange Commission).
- Methodology: IOSCO Assessment Methodology Guidelines (December 2003); primary basis: interviews between February 22 and March 6, 2006; 2001 material used where applicable.

### B. Institutional and Market Structure — Debt Market
- Market characteristics and infrastructure:
  - Daily trading dominated by short-term government debt; primarily repo transactions among banks, brokers, institutions, and private investors.
  - Over 97 percent of the daily trading volume occurs in the over-the-counter market.
  - Approximately 60 percent of this trading is through repo transactions.
  - Virtually all trading occurs electronically; substantial proportion occurs through the Integrated Financial Services (SIF), an interdealer broker partially owned by the Mexican Stock Exchange.
  - Institute for the Deposit of Securities (INDEVAL) clears and settles debt market trading, including repos of longer than two days, on a bilateral netting basis.
  - INDEVAL clears and settles on a T+2 cycle; repos of one- or two-day durations are still processed bilaterally.
- Legal and regulatory developments:
  - 2001 FSAP recommendations: create a standard master agreement for repo transactions; formalize recordation/clearance/settlement of underlying collateral; expand institutions permitted to engage in repo transactions.
  - 2003 Bank of Mexico (BOM) regulation: required use of a standard master agreement (for repos longer than three days); permitted securities lending; permitted corporate bonds to be traded in the repo market.
  - Remaining restriction: mutual funds are only permitted to engage in repos as the recipient not the lender of the security.
- Market size and activity:
  - IMF Selected Issues Paper (December 2005): Mexico has an extended yield curve in the local government debt market, maturities up to 20 years at a fixed rate; high turnover ratio of 695 percent in 2004.
  - Corporate debt market: approximately 2 percent of GDP in 2003-04.
- Debt instrument innovation:
  - 2001 Ley del Mercado de Valores (LMV) created Certificado bursátil (CB).
  - CB issuance growth examples:
    - 2002: 10 offerings of long term CBs by state entities for approximately US$500 million.
    - 2005: 21 offerings for more than US$7.3 billion.
    - 2002: 59 long term corporate CB issues raising nearly US$3.4 billion.
    - 2005: 62 corporate offerings raised more than US$6.6 billion.

### C. Institutional and Market Structure — Equity Market (Bolsa)
- Market size, listings, and recent trends:
  - Number of listed companies: decreased from 190 in 1993 to 168 in 2001; following compulsory delistings by the CNBV, listings declined to 132 (155 listed stocks) in 2005.
  - Average daily value of stocks traded: US$249 million in 1993 (average daily trading volume of 112 stocks) to US$238 million in 2001 (average daily trading volume of 125 million stocks).
  - Total market capitalization: dropped from US$201 billion in 1993 to US$127 billion in 2001; grew from US$104 billion in December 2002 to US$236 billion at the end of 2005.
  - IPC performance: rose nearly 46.5 percent in 2004 and nearly 44 percent in 2005.
  - Bolsa estimates that 45 percent of the market is foreign owned.
- Market concentration and liquidity:
  - Daily trading volume highly concentrated; four stocks comprise approximately 50 percent of the IPC: Telmex, AMX, Walmex, and Cemex.
  - Top 10 companies represent close to 70 percent of market capitalization.
  - Free float is limited; trading volumes are low.
- Market structure and trading systems:
  - Equity market entirely electronic; no specialists or market makers.
  - Central limit order book visible to member firms but not to other traders (others see only best bid/offer, size, last trade).
  - Securities divided into two trading categories:
    - 90 stocks traded through the continuous market system.
    - 53 less liquid stocks traded through the continuous auction process (criteria: fewer than eight million free float shares or less than 12 percent of capitalized shares free floating, fewer than 100 investors, or fewer than 36 trades in a six-month period).
    - Continuous auction orders must be exposed for price improvement to an open auction for a one-hour period; Bolsa estimates this procedure has reduced trading halts by roughly 80 percent.
- Cross-listing and foreign trading:
  - Seven largest cap Mexican stocks dually listed in the United States; bulk of daily trading occurs in the U.S.A., producing arbitrage opportunities.
  - Outstanding ADRs reached US$48.9 billion in May 2005, equivalent to more than 20 percent of Mexican market capitalization.
  - Mercado Global (MG) created in 2003 to permit domestic trading in approximately 200 foreign-listed equities, including 12 foreign exchange-traded funds (ETF’s).
    - MG trading: investor order executed in foreign market by Bolsa firm in riskless-principal capacity; exposed for 20 seconds on Bolsa system; superior bid/offer in that window entitled to 5 percent of the trade.
    - Executed trades cleared through INDEVAL with foreign custodian arrangement via Deutsche Bank; INDEVAL reports its custodian account at Deutsche Bank contains more than US$2 billion in securities.
    - Foreign shares sold through the MG are not subject to Mexican capital gains tax; dividends received on a share purchased through the MG are taxed at a 10 percent income tax rate.
    - Trading in foreign unlisted shares on the MG represents 10-30 percent of daily trading volume.
    - AFOREs active in MG trading of foreign ETF’s because pension funds are not permitted to purchase individual equities.

### D. Institutional and Market Structure — Derivatives Market (MexDer)
- Market organization and products:
  - MexDer began operations in December 1998; Bolsa owns 78 percent.
  - Transitioned from open-outcry to fully electronic futures market in March 2000; fully electronic options market began in March 2004.
  - Offers futures on foreign currency exchange rates, the IPC, five fixed income products, and five individual equities (Cemex CPO, Femsa UBD, Gcarso A1, Telmex L, and Amx L).
  - Listed options on the IPC, two individual stocks (Amx L, Naftrac 02), and two ETFs (NASDAQ 100 index (QQQ) and the iShares S&P500 Index (IVV)).
  - MexDer reports it is now the fifth largest futures market in the world.
- Market concentration and participants:
  - Trading activity highly concentrated in interest rate futures: more than 90 percent of daily trading volume.
  - Main users: four clearing members (each is a legal trust created and owned by a major bank).
  - Clearing member collateral example: MexDer/ASIGNA clearing members required to pledge collateral valued at 750 million pesos.
- Regulatory changes and access:
  - Recent changes permit foreign brokers to trade through an omnibus account with a clearing member without registering as a securities firm with the SHCP (SHCP must be notified and may veto the relationship).
  - Private pension funds permitted limited investment in derivatives (allocations determined by BOM regulations); mutual funds seeking similar authority.

### E. Investors and Investment Vehicles
- Mutual funds (sociedades de inversión):
  - Growth since 2001 reform to the Ley de Sociedades de Inversión.
  - Thirty-four licensed mutual fund operators (23 owned by other financial institutions and 11 independent) manage 425 funds, with US$47 billion in total assets and over 1 million investors, as of 2005.
  - Industry asset growth: 72 percent in asset size since 2001.
  - Mutual fund assets overwhelmingly invested in debt over equity.
  - Mutual funds prohibited from investing in derivatives (authority likely in 2006).
- Private pension system (AFOREs):
  - Created in 1997; by October 2004 AFOREs were managing pensions for 32.9 million people.
  - 60 percent of registered accounts concentrated in the five largest AFOREs.
  - AFOREs may invest in investment grade debt, a limited amount of futures contracts (allocations determined by BOM regulations), and indices of funds of equity securities; may not invest in individual equity securities.
- High net worth and foreign investors:
  - Individual high net worth investors estimated at over 50,000 accounts with combined assets of more than US$60 billion.
  - Bolsa estimates 45 percent of listed equities are owned by foreigners, primarily institutional investors.

### F. Regulatory Structure and the CNBV — Governance and Institutional Structure
- CNBV background:
  - Created in 1995 by the National Banking and Securities Commission Law (LCNBV), merging National Banking Commission and National Securities Commission.
  - Headed by a 10-member Board of Governors:
    - Five members, including the President of the Commission, appointed by the Secretary of Finance and Public Credit (SHCP).
    - Three members appointed by the BOM.
    - The pension regulator (CONSAR) appoints one member.
    - The insurance regulator (CNSF) appoints one member.
  - Appointments are not for fixed terms.
- SHCP authorities and relationships:
  - Broad supervisory responsibility over the CNBV, including setting its annual budget.
  - Final authority over legal interpretations of relevant laws.
  - Final authority over referral of matters to the Ministry of Justice for criminal action.
  - Final responsibility for approval of exchange licenses, derivative firms and banks, with a duty to consult with the CNBV and the BOM.
  - Until 2005 had similar responsibility for licensing securities firms (transferred to CNBV in 2005).
- BOM authorities:
  - Final authority over matters involving the government debt market and matters dealing with the extension of credit.
- COFEMER:
  - Created in 2001; has advisory responsibility over governmental regulations.
  - All CNBV regulations are subject to review by COFEMER; COFEMER must publish proposals on its web site and oversee public comment.
- CONDUSEF:
  - Government agency acting as an informal ombudsman for consumer disputes; does not possess enforcement authority.

### G. Self-Regulatory Organizations (SROs) and Functions
- Designated SROs include Bolsa, MexDer, AMIB, AMAII, INDEVAL and its subsidiary CCV, and ASIGNA.
- Selected SRO roles and limits:
  - Bolsa: limited surveillance; monitors trading; imposes trading halts when a stock moves more than 15 percent within a day; reviews prospectuses with CNBV; lacks authority to compel testimony or take disciplinary action—refers suspicious activity to CNBV.
  - MexDer: analogous functions in futures market; owned by Bolsa.
  - AMIB: conducts licensing exams for employees selling securities and mutual funds; adopts regulations on internal operations; may fine members for failure to file required reports or for filing incorrect reports.
  - AMAII: voluntary organization with 25 members (out of 45 registered independent advisers); contracts external firm to perform eight inspections annually.
  - INDEVAL: monitors members’ securities positions; may require additional reserves for failed transactions; no disciplinary authority; owns and operates CCV; CNBV periodically audits INDEVAL and CCV.

### H. Legal Framework and Reform Highlights (2001 and 2005)
- Foundational laws: 1934 Mexican Corporation Law (LSM); 1975 Securities Market Law (LMV).
- LMV amendments: substantially amended in April 2001; New Securities Market Law issued December 2005 (effective June 2006).
- 2001 reforms addressed five core areas: expanded CNBV investigatory and disclosure authority; permitted information sharing; enabled secondary regulations to protect minority shareholders; shift to disclosure-based offering review; mandated listed company governance changes (audit subcommittee, minimum independent directors, minority shareholder rights of 10 percent appointment and 20 percent private litigation).
- CNBV post-2001 actions: revised and codified many secondary regulations; signatory to IOSCO multilateral information-sharing agreement; began publicizing basic information on completed disciplinary actions; solicited public input via COFEMER.
- December 2005 New Securities Market Law (three broad categories):
  - Further expansion of CNBV authority.
  - Substantial changes in corporate governance.
  - Creation of two new corporate vehicles to facilitate capital raising (SAPI and SAPI B).
- Key 2005 legal changes:
  - Transfer of securities firm licensing from SHCP to CNBV; CNBV may issue limited function brokerage licenses.
  - CNBV authority to appoint special administrators to manage failing securities firms and to revoke licenses.
  - Additional enforcement powers: investigate and sanction attorneys, auditing firms and external auditors, corporate officers and Board members; refer misconduct to the Ministry of Justice.
  - Clarified prohibited insider trading and manipulative activities in the derivatives market.
- Corporate governance specifics:
  - 2001: boards required at least 25 percent independent directors; audit subcommittee required (majority independent and chaired by independent director); comisario required with minority shareholder appointment rights; shareholders with 20 percent authorized to bring private lawsuits.
  - 2005: audit committees required to be 100 percent independent; created title of Director General with explicit CEO/Board responsibilities; CEO responsible for books, records and accounting process; Board/Audit Committee assume comisario duties; comisario function eliminated for listed companies.
  - Fiduciary duties codified: duty of due care and duty of loyalty; prohibitions on authorizing related party transactions without disclosure, voting with conflicts, using privileged information, and taking advantage of company assets without authorization.
  - Violations: civil litigation by company or minority shareholder owning 5 percent (reduced from 20 percent); CNBV can suspend or bar an officer or director for up to five years.
- New corporate vehicles:
  - SAPI: issue securities to institutional and qualified investors in private transactions without registration; no disclosure obligations; not subject to listed-company governance/auditing requirements.
  - SAPI B: three-year transitional status for a SAPI interested in becoming listed; special Bolsa listing status while implementing plan to conform to listed-company obligations.

### I. Principle-by-Principle Implementation Summary and Key Statistics
- Table 2 summary implementation (as reported):
  - Implemented: 27
  - Broadly implemented: 3 (Principles 2, 3, 4)
  - Partly implemented: none listed
  - Nonimplemented: none listed
  - Not applicable: none listed
- Principles relating to regulator (1–5):
  - Principle 1: Implemented.
  - Principle 2: Broadly implemented (operational independence exists but constrained by SHCP oversight, COFEMER consultation, lack of fixed terms, and budgetary approval by SHCP and Congress).
  - Principle 3: Broadly implemented (adequate powers and operating budgets reported; loss of budgetary independence in 2000 noted).
  - Principle 4: Broadly implemented (transparency improved; draft secondary regulations published for 20 days via COFEMER; remaining issues in discipline transparency).
  - Principle 5: Implemented (staff prohibited from direct ownership of individual securities; Internal Comptroller; civil service reform in 2003; legal defense fund for staff).
- Self-regulation (6–7): Implemented.
- Enforcement (8–10): Implemented — CNBV conducts annual reviews of all 29 registered securities firms; mutual fund inspections described; CNBV may demand documents and testimony; may impose fines, suspensions, industry bars; cannot order restitution to compensate defrauded investors.
- Cooperation (11–13): Implemented — Article 25 (2001 reforms) and Articles 192 and 358 (2005 law) expand information-sharing; Mexico signatory to IOSCO Multilateral MOU; formal MOUs among CNBV, CNSF, CONSAR, AML Intelligence unit in SHCP, and BOM.
- Issuers (14–16): Implemented — CNBV electronic filings via EMISNET; filing timetables preserved; tender offer rules specified (10 percent notify, 30 percent tender offer threshold); SAPI/SAPI B introduced with qualified investor thresholds (qualified defined as approximately US$450,000 investable net worth and annual income greater than approximately US$150,000).
  - Numeric and timing points:
    - 132 listed companies; 155 equity securities listed.
    - CNBV internal policy: staff comments to prospective issuers sent within eight days after filing.
    - Tender offer thresholds and disclosure levels: 10 percent, 30 percent, additional 5 percent.
- Collective investment (17–20): Implemented — 34 fund operators manage 425 funds; US$47 billion total assets; CNBV-required weekly portfolio reports; valuation and audit independence rules noted (audit firm revenue cap and signing-partner rotation).
  - Specifics:
    - AMAII membership: 25 members out of 45 registered independent advisers.
    - Audit firm independence: prohibition on an audit firm receiving more than 10 percent of its revenue from one client; compulsory signing-partner rotation every five years.
    - INDEVAL reports .5 percent failure rate on settlements.
- Market intermediaries (21–24): Implemented — 29 registered securities firms; associated persons pass AMIB exams; daily electronic position reports; 25 permitted activities identified for limited-function brokers.
  - Clearing and membership:
    - Four clearing members dominate MexDer; 20 nonclearing members.
    - ASIGNA margin collateral requirement: 750 million pesos per clearing member.
    - CNBV budget typically represents approximately 80 percent of fees to be collected.
- Secondary market (25–30): Implemented — Bolsa fully electronic; normal orders exposed within five minutes (reduced from 20 minutes in 2001); trading halt rule: 15 percent intraday price movement.
  - Global Mercado: exposures of 20 seconds; 5 percent allocation to superior offers; Global Mercado comprises 10-30 percent of Bolsa trading.
  - CCV collateral mechanics: three-day open positions, 500 day moving average; collateral calls with 30 minute cure window; call not satisfied only eight times in two years.
  - INDEVAL failure rate: .5 percent on settlements largely due to T+2/T+3 mismatches.
  - Bolsa capacity upgraded to handle spikes up to ten times recent peak periods.

### J. Findings from 2001 FSAP Assessment (summarized)
- Areas warranting improvement identified in 2001:
  - Lack of a standard master agreement for repo transactions.
  - CNBV required additional legal authority to implement enforcement responsibilities (including full subpoena authority and broader sanctioning authority).
  - CNBV regulatory process would benefit from greater transparency and public/industry comment.
  - CNBV would have greater visibility/effectiveness if permitted to fully disclose and publicize enforcement actions.
  - Greater legal protection of minority shareholders and lower thresholds for private legal action needed.
  - Need to adopt international best practices for corporate governance and information sharing with foreign regulators.
- April 2001 Congressional reforms and subsequent CNBV actions addressed many of these items; December 2005 New Securities Market Law further expanded CNBV authority and corporate governance measures.

### K. Key Recommended Actions (selected/high-level)
- Regulator independence and governance:
  - Consider budgetary independence for CNBV and creation of fixed-term Board appointments; reduce areas requiring formal consultation with other governmental entities.
  - Increase transparency and due process protections in CNBV disciplinary process.
- SROs and market innovation:
  - Streamline overlapping oversight that impedes futures market innovation.
- Enforcement and investor redress:
  - Continue development of CNBV enforcement program; better utilize authority to publicize enforcement.
  - Consider mechanisms to allow restitution to defrauded investors (CNBV powers currently do not include ordering restitution).
- Cooperation and information sharing:
  - Address limitation where CNBV cannot obtain information on behalf of foreign regulators absent a nexus to Mexican law violations.
  - Promote further information sharing among Mexican financial regulators.
- Issuers, accounting and audit oversight:
  - Emphasize CNBV review of financial statements and accounting issues in disclosure reviews.
  - Adopt secondary regulations for SAPI and SAPI B in time for June 2006 effective date.
  - Monitor tender offer pricing rules to ensure they do not act as a statutory "poison pill."
  - Examine and update Mexican auditing standards consistent with international norms and 2005 law changes.
- Collective investment schemes:
  - Re-examine mutual fund categorization and investment restrictions; finalize secondary regulations enabling derivatives investing if appropriate.
  - Review price valuator operations and consider secondary regulation on alternative pricing methodology and triggers for use.
  - Resolve insurance products marketed as mutual funds with CNSF.
- Market intermediaries and risk management:
  - Finalize CNBV secondary regulation on licensing limited-function securities firms.
  - Encourage AMIB to develop certification tests for compliance and risk management officers.
  - Formalize consolidated supervision of affiliated banks and brokers.
- Secondary market and settlement:
  - Examine objectives and costs/benefits of Global Mercado and its tax incentives.
  - Improve price transparency in the debt market (expanded access to quotations and timely last-sale reporting).
  - Address processing and legal uncertainties arising from one- and two-day repo transactions not cleared through INDEVAL.
  - Consider cost-benefit analysis of building a central counterparty for the debt market.

*Source: _cr07168 - IMF staff assessment (IOSCO Principles assessment and recommended action plan).*

### 1. Principle-by-Principle Assessment of Observance of the IOSCO Objectives

### 1. Principle-by-Principle Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation

### A. General
- This assessment covers the National Banking and Securities Commission (CNBV), other relevant regulatory agencies, and self-regulatory organizations (SRO).
- It is an update of an earlier assessment prepared in 2001.
- Both assessments were performed as one component of an assessment of the Mexican financial system under the Financial Sector Assessment Program (FSAP) conducted jointly by the International Monetary Fund (IMF) and the World Bank.
- Both assessments were prepared by Mr. Jonathan Katz (consultant, formerly with the U.S. Securities and Exchange Commission).

### B. Information and Methodology Used for Assessment
- Prepared in accordance with the guidance contained in the IOSCO Assessment Methodology Guidelines (December 2003 version).
- Material from the 2001 IOSCO Assessment Report was used when applicable.
- Primary basis: interviews conducted between February 22 and March 6, 2006 with employees of the CNBV, officials of other Mexican government agencies, representatives of pertinent SROs, and persons knowledgeable about the Mexican financial services industry and capital markets and regulatory system.
- Interviews were augmented by appropriate reference materials and discussions with other members of the FSAP mission team.

### C. Institutional and Macroprudential Setting, Market Structure

- The debt market
  - The Mexican securities market is dominated by daily trading in short-term government debt securities, primarily through repo transactions among banks, brokers, institutions, and private investors.
  - Over 97 percent of the daily trading volume occurs in the over-the-counter market.
  - Approximately 60 percent of this trading is through repo transactions.
  - Virtually all trading occurs electronically; a substantial proportion occurs through the Integrated Financial Services (SIF), an interdealer broker partially owned by the Mexican Stock Exchange.
  - The Institute for the Deposit of Securities (INDEVAL) clears and settles debt market trading, including repos of longer than two days, on a bilateral netting basis.
  - 2001 FSAP recommendations: create a standard master agreement for repo transactions, formalize recordation/clearance/settlement of underlying collateral, expand institutions permitted to engage in repo transactions.
  - 2003 Bank of Mexico (BOM) regulation: required use of a standard master agreement (for repos longer than three days), permitted securities lending, permitted corporate bonds to be traded in the repo market.
  - Remaining restrictions: mutual funds are only permitted to engage in repos as the recipient not the lender of the security.
  - INDEVAL clears and settles on a T+2 cycle; repos of one- or two-day durations are still processed bilaterally, potentially leaving collateral assignment unperfected and transactions not subject to the standard master agreement.
  - IMF Selected Issues Paper (December 2005): Mexico has an extended yield curve in the local government debt market, maturities up to 20 years at a fixed rate; high turnover ratio of 695 percent in 2004.
  - Corporate debt market: approximately 2 percent of GDP in 2003-04.
  - Mexican pension plans are the principal investors in investment-grade corporate debt, though it represents only a very small portion of these pension portfolios.
  - Legal change in 2001 (Ley del Mercado de Valores, LMV): created Certificado bursátil (CB), a flexible debt security that can be issued without shareholder action and can include payment guarantees and credit enhancements.
  - CB issuance growth examples:
    - 2002: 10 offerings of long term CBs by state entities for approximately US$500 million.
    - 2005: 21 offerings for more than US$7.3 billion.
    - 2002: 59 long term corporate CB issues raising nearly US$3.4 billion.
    - 2005: 62 corporate offerings raised more than US$6.6 billion.
  - Reuters operates an electronic system for spot transactions in government securities.
  - The Bolsa operates, jointly with Garvans, a trading system for overnight repos in government securities, the SIF; these systems are registered as an interdealer broker, not an exchange.

- Equity Market — The Bolsa Mexicana de Valores (Bolsa)
  - The Bolsa Mexicana de Valores (BMV or Bolsa) is a member-owned-for-profit institution.
  - From 1995 through 2001 activity on the Bolsa declined and stagnated:
    - Number of listed companies decreased from 190 in 1993 to 168 in 2001.
    - Following compulsory delistings by the CNBV, listings declined to 132 (155 listed stocks) in 2005.
    - Average daily value of stocks traded: US$249 million in 1993 (average daily trading volume of 112 stocks) to US$238 million in 2001 (average daily trading volume of 125 million stocks).
    - Total market capitalization dropped from US$201 billion in 1993 to US$127 billion in 2001.
  - Recent rebound:
    - IPC rose nearly 46.5 percent in 2004 and nearly 44 percent in 2005.
    - Daily trading volume remains highly concentrated in a very small number of issuers; four stocks comprise approximately 50 percent of the IPC: Telmex, AMX, Walmex, and Cemex.
    - Total market capitalization grew from US$104 billion in December 2002 to US$236 billion at the end of 2005.
    - Bolsa estimates that 45 percent of the market is foreign owned.
  - Market structure and trading systems:
    - Equity market is entirely electronic, with no specialists or market makers.
    - Electronic central limit order book visible to member firms but not to other traders, who only see the best bid and offer and accompanying size and the last reported trade.
    - Informally, member firms often provide full book visibility to some customers.
    - Securities listed on the Bolsa are divided into two categories with separate trading procedures:
      - 90 stocks traded through the continuous market system (larger free floats and greater daily activity).
      - 53 less liquid stocks traded through the continuous auction process (criteria: fewer than eight million free float shares or less than 12 percent of capitalized shares are free floating, fewer than 100 investors, or fewer than 36 trades in a six-month period).
      - Continuous auction orders must be exposed for price improvement to an open auction for a one-hour period; Bolsa estimates this procedure has reduced trading halts by roughly 80 percent.
  - Cross-listing and foreign trading:
    - The seven largest cap Mexican stocks are dually listed in the United States and the bulk of daily trading occurs in the U.S.A., producing arbitrage opportunities.
    - Automated program trading and cancelled orders have taxed Bolsa’s systems; the Bolsa has expanded order processing capacity to approximately 10 times current peak order volume.
    - Larger companies increasingly prefer international listings (often ADRs); in 2000 almost half of listed firms had a foreign listing or had raised capital abroad.
    - Outstanding ADRs reached US$48.9 billion in May 2005, equivalent to more than 20 percent of Mexican market capitalization.
  - Mercado Global (MG):
    - Created in 2003 to permit domestic trading in approximately 200 foreign-listed equities, including 12 foreign exchange-traded funds (ETF’s).
    - Trading process: investor submits order to a Bolsa firm which purchases the share in the foreign market in largely riskless-principal capacity; transaction is exposed for 20 seconds on the Bolsa system for price competition; a superior bid/offer in that window is entitled to 5 percent of the trade.
    - Executed trades are cleared through INDEVAL which maintains a foreign custodian arrangement via Deutsche Bank.
    - Foreign shares sold through the MG are not subject to Mexican capital gains tax; dividends received on a share purchased through the MG are taxed at a 10 percent income tax rate.
    - Trading in foreign unlisted shares on the MG represents 10-30 percent of daily trading volume.
    - AFOREs are active participants in MG trading of foreign ETF’s because pension funds are not permitted to purchase individual equities.
    - INDEVAL reports its custodian account at Deutsche Bank contains more than US$2 billion in securities.
  - Equity market limitations:
    - Mexico’s equity market remains relatively small and illiquid, and is not a major source of financing for most companies.
    - Of the eight largest economies in the Americas, Mexico has the second smallest stock market, relative to GDP.
    - The free float is limited; trading volumes are low.
    - High concentration: top 10 companies represent close to 70 percent of market capitalization.
    - Ownership of listed firms is highly concentrated; historically companies issued multiple classes of nonfungible shares to avoid dilution of corporate control, fragmenting the securities market and reducing liquidity.
    - Legal reforms since 2001 have significantly restricted the ability of companies to issue multiple classes of securities.
    - CNBV regulations codified in recent legal reforms have prohibited acquirers via tender offers or mergers from paying a premium for shares with greater voting power.

- Derivatives market — mercado mexicano de derivados (MexDer)
  - MexDer began operations in December 1998 as the national derivatives market.
  - Privately owned, Bolsa owns 78 percent.
  - Transitioned from open-outcry to fully electronic futures market in March 2000; fully electronic options market began in March 2004.
  - MexDer offers futures on foreign currency exchange rates, the IPC, five fixed income products, and five individual equities (Cemex CPO, Femsa UBD, Gcarso A1, Telmex L, and Amx L).
  - Listed options on the IPC, two individual stocks (Amx L, Naftrac 02), and two ETFs (NASDAQ 100 index (QQQ) and the iShares S&P500 Index (IVV)).
  - MexDer reports it is now the fifth largest futures market in the world.
  - Trading activity is highly concentrated in its interest rate futures product: more than 90 percent of daily trading volume.
  - Main users: four clearing members (each is a legal trust created and owned by a major bank).
  - Recent regulatory changes permit foreign brokers to trade through an omnibus account with a clearing member without registering as a securities firm with the SHCP (SHCP must be notified and may veto the relationship).
  - Private pension funds are now permitted to invest a limited percentage of assets in derivatives (allocations determined by BOM regulations); mutual funds are seeking similar authority.

- Investors
  - Mutual funds (sociedades de inversión):
    - Growth since the 2001 reform to the Ley de Sociedades de Inversión.
    - Thirty-four licensed mutual fund operators (23 owned by other financial institutions and 11 independent) manage 425 funds, with US$47 billion in total assets and over 1 million investors, as of 2005.
    - Industry asset growth: 72 percent in asset size since 2001.
    - Mutual fund assets are overwhelmingly invested in debt over equity.
    - Mutual funds are prohibited from investing in derivatives (although such authority is likely in 2006).
  - Private pension system (AFOREs):
    - Created in 1997; by October 2004 AFOREs were managing pensions for 32.9 million people.
    - 60 percent of registered accounts concentrated in the five largest AFOREs.
    - AFOREs may invest in investment grade debt, a limited amount of futures contracts (allocations determined by BOM regulations), and indices of funds of equity securities.
    - AFOREs may not invest in individual equity securities.
  - High net worth and foreign investors:
    - Individual high net worth investors estimated at over 50,000 accounts with combined assets of more than US$60 billion.
    - Bolsa estimates 45 percent of listed equities are owned by foreigners, primarily institutional investors.

### II. Description of Regulatory Structure and Practices

- The securities regulatory environment in Mexico is complex, involving several government agencies with distinct responsibilities, interlocking supervisory structures, and numerous legal responsibilities to consult prior to taking action.

*Source: _cr07168 - 1. Principle-by-Principle Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation*

### 24.      The National Banking and Securities Commission (CNBV) was created in 1995 by

### _cr07168 - 24.      The National Banking and Securities Commission (CNBV) was created in 1995 by

### Governance and institutional structure of the CNBV
- CNBV created in 1995 by the National Banking and Securities Commission Law (LCNBV), merging the previously independent National Banking Commission and National Securities Commission.
- CNBV is headed by a 10-member Board of Governors:
  - Five members, including the President of the Commission, are appointed by the Secretary of Finance and Public Credit (SHCP).
  - Three members are appointed by the BOM.
  - The pension regulator (CONSAR) appoints one member.
  - The insurance regulator (CNSF) appoints one member.
- SHCP responsibilities and authorities:
  - Broad supervisory responsibility over the CNBV, including setting its annual budget.
  - Final authority over legal interpretations of the relevant laws.
  - Final authority over referral of matters to the Ministry of Justice for criminal action.
  - Final responsibility for approval of exchange licenses, derivative firms and banks, with a duty to consult with the CNBV and the BOM.
  - Until 2005 had similar responsibility for licensing securities firms.
- BOM authorities:
  - Final authority over matters involving the government debt market and over matters dealing with the extension of credit.
- COFEMER (created in 2001) has advisory responsibility over governmental regulations:
  - All CNBV regulations are subject to review by COFEMER.
  - COFEMER must publish proposals on its web site and oversee the public comment process.
- CONDUSEF: government agency acting as an informal ombudsman for consumer disputes; does not possess enforcement authority.

### Self-regulatory organizations (SROs) and their functions
- Designated SROs under Mexican law include:
  - Bolsa (Mexican stock exchange)
  - MexDer (derivatives exchange)
  - AMIB (organization of securities firms)
  - AMAII (association of independent investment advisers)
  - INDEVAL (national securities depository) and its subsidiary CCV (central counterparty for equity clearance and settlement)
  - ASIGNA (central counterparty for clearance and settlement on MexDer)
- Bolsa:
  - Limited surveillance: staff monitor trading activity and impose trading halts when a stock moves more than 15 percent within a day or when there is the possibility that an issuer has not disclosed material information.
  - Reviews prospectuses of all new listings in conjunction with the CNBV to ensure listing standards are met.
  - Lacks authority to compel testimony or disclosure from members or their employees; unable to conduct investigations or take disciplinary actions; refers all suspicious activity to the CNBV.
- MexDer: performs analogous functions in the futures market; owned by the Bolsa.
- AMIB:
  - Conducts licensing exams for employees of securities firms, mutual funds, and bank employees involved in selling securities.
  - Adopts regulations for securities firms concerning internal operations (e.g., compliance and risk management).
  - Receives and monitors member firms’ compliance with CNBV capital requirements.
  - Has authority to fine members for failure to file required reports or for filing incorrect reports.
- AMAII:
  - Voluntary organization with 25 members (out of 45 registered independent advisers) who have agreed to be inspected periodically.
  - Contracts with a big four accounting firm to perform eight inspections annually.
- INDEVAL:
  - Monitors securities positions of its members and may require additional reserves for firms with increases in failed transactions.
  - No disciplinary authority.
  - Owns and operates the CCV.
  - CNBV periodically audits INDEVAL and CCV.
- CNBV maintains regulatory oversight over sectors while SROs exercise certain powers.

### Mexican legal framework for securities markets and reforms
- Foundational laws:
  - 1934 Mexican Corporation Law (LSM)
  - 1975 Securities Market Law (LMV)
- LMV amendments:
  - Substantially amended in April 2001.
  - New Securities Market Law issued in December 2005 (effective in June 2006).
  - Expanded CNBV authority to adopt regulations and procedures to implement law requirements.
  - Specialized CNBV divisions regulate bank and securities activities.
- IOSCO core objectives identified:
  - (i) the protection of investors;
  - (ii) ensuring that markets are fair, efficient, and transparent;
  - (iii) the reduction of systemic risk.
- Legal limitations identified in March 2001 assessment (five areas discussed):
  - The scope of the CNBV’s enforcement authority, its ability to publicize its actions and thereby promote investor confidence in the securities markets and deter misconduct by others.
  - Promoting market efficiency and reduced regulatory overhead by introducing greater flexibility in the regulatory structure.
  - Enhancing public confidence in regulation by adopting procedures to ensure public input into the regulatory process and to enhance procedural due process in the disciplinary process.
  - Enhancing minority shareholder rights through improved corporate governance standards and easier access to the courts to protect these rights.
  - Difficulty obtaining assistance from overseas regulators when pursuing investigations of possible Mexican securities law violations due to an inability to provide reciprocal assistance to foreign regulators because of Mexican bank secrecy laws.
- April 2001 Congressional reforms addressed the five core areas:
  - Expanded CNBV authority to conduct investigations and publicly disclose disciplinary actions.
  - Permitted information sharing with other government regulators and with foreign regulators.
  - Enabled enactment of secondary regulations to protect minority shareholder rights.
  - Shifted from merit-based to disclosure-based system of securities offering review.
  - Mandated listed company governance changes: creation of an audit subcommittee; mandatory minimum percentage of independent directors; specific minority shareholder representation rights (10 percent) and private litigation rights (20 percent).
  - Mutual fund law amended to separate certain operational functions to expand competition and investor protections.
- CNBV actions after 2001 amendments:
  - Revised, updated, and codified many discrete secondary regulations into unified regulations.
  - Became a signatory to the IOSCO multilateral agreement on information sharing.
  - Began publicizing basic information on completed disciplinary actions.
  - Systematically solicited public and industry input in development of secondary regulations via COFEMER’s web site.
  - Adopted a secondary regulation on tender offers requiring price equality for different classes of securities.
- December 2005 New Securities Market Law (three broad categories of change):
  - Further expansion of the CNBV’s authority.
  - Substantial changes in corporate governance of publicly listed companies.
  - Creation of two new corporate vehicles to facilitate capital raising and transition to public status for small and medium-sized companies.
- Key 2005 legal changes:
  - Transfer of authority to license securities firms from the SHCP to the CNBV; CNBV may issue limited function brokerage licenses.
  - CNBV authority to appoint special administrators to manage failing securities firms and to revoke a firm’s license if necessary.
  - Additional enforcement powers: power to investigate and sanction attorneys, auditing firms and external auditors, and corporate officers and Board members responsible for securities law violations and refer such misconduct to the Ministry of Justice for criminal action.
  - Clarification of prohibited insider trading and manipulative activities in the derivatives market.
- Corporate governance changes (2001 and 2005):
  - 2001: boards of listed companies required at least 25 percent independent directors; audit subcommittee required (majority independent directors and chaired by an independent director); requirement for a comisario (internal reviewer); shareholders controlling 10 percent right to appoint a second comisario; shareholders with 20 percent authorized to bring private lawsuits.
  - 2005: codified tender offer regulation; audit committees required to be composed of 100 percent independent directors; created title of Director General (comparable to an American CEO) and explicitly delineated CEO and Board responsibilities; CEO responsible for books, records and accounting process; Board through Audit Committee responsible for review of external audit and duties previously assigned to comisario (comisario function eliminated for publicly listed companies).
  - Concept of a single economic unit established, extending Board responsibilities to any subsidiary or affiliate that is part of the single economic unit; audit committee empowered to require appearances by all company employees, including those of subsidiaries.
- Fiduciary duties (2005 law):
  - Board members and officers have fiduciary duties to the company and its shareholders: duty of due care and duty of loyalty.
  - Board members are specifically prohibited from:
    - Cannot authorize related party transactions without full disclosure and formal actions;
    - Cannot vote if a conflict of interest exists;
    - Must disclose any conflicts;
    - Cannot use privileged information;
    - Cannot take advantage of company assets or corporate activities without authorization.
  - Violations:
    - Can be punished in civil litigation brought by the company or a minority shareholder owning 5 percent (a reduction from the 2001 law).
    - Private action can be resolved through a negotiated settlement with explicit approval of the company Board.
    - CNBV can bring an action to suspend or bar an officer or a director for up to five years.
- New corporate vehicles (SAPI and SAPI B):
  - SAPI:
    - Will be able to issue securities to institutional investors and qualified investors in private transactions, without having to register with the CNBV or on the National Corporate Registry.
    - No disclosure obligations.
    - Not subject to corporate governance and auditing requirements that apply to listed companies.
    - No restrictions on types of securities or special features attached to securities.
  - SAPI B:
    - Three-year transitional status for a SAPI interested in becoming a listed public company.
    - During the three-year period a SAPI B will have special listing status on the Bolsa while implementing a plan to fully conform to legal obligations of listed companies.

### Findings of the 2001 FSAP Assessment (summarized)
- Identified areas warranting regulatory improvement:
  - Lack of a standard master agreement for repo transactions in the debt market.
  - CNBV required additional legal authority to implement enforcement responsibilities, including full subpoena authority and broader sanctioning authority.
  - CNBV regulatory process would benefit from greater transparency and opportunity for public and industry comment.
  - CNBV would have greater visibility and effectiveness if permitted to fully disclose and publicize its enforcement actions.
  - Greater legal protection of minority shareholders was necessary and minimum thresholds for private legal action needed to be lowered.
  - Need to adopt international best practices for corporate governance, particularly concerning transfers of control and limitations on officer and director self-dealing.
  - Need to adopt international standards for sharing information with foreign regulators and with other domestic regulatory authorities.

*IMF staff report content unit: _cr07168 - 24.*

### 44. As discussed in the detailed assessment below, substantial progress has been made in

### _cr07168 - 44. As discussed in the detailed assessment below, substantial progress has been made in

### Overview — principle-by-principle assessment
- Substantial progress has been made in all areas identified in the 2001 assessment.
- Table 2 summary implementation:
  - Implemented: 27
  - Broadly implemented: 3 (Principles 2, 3, 4)
  - Partly implemented: none listed
  - Nonimplemented: none listed
  - Not applicable: none listed

### Principles Relating to the Regulator (Principles 1–5)
- Principal legal framework: 1934 Mexican Corporation Law (LSM) and 1975 Securities Market Law (LMV); New Securities Market Law issued in 2005 (effective June 2006).
- Regulator: Comisión Nacional Bancaria y de Valores (CNBV)
  - Board composition: 10 member Board of Governors; appointments: 5 by SHCP (including President), 3 by BOM, 1 by CONSAR, 1 by CNSF. Appointments are not for fixed terms.
  - Budget: CNBV budget represents approximately 80-90 percent of total fees paid; historically reported as approximately 80 percent of fees to be collected.
  - Staffing and powers: CNBV has licensing, inspection, subpoena, and enforcement authority; may bar individuals for up to 5 years.
- Key implementation assessments:
  - Principle 1: Implemented.
  - Principle 2: Broadly implemented — operational independence exists but is constrained by SHCP oversight, COFEMER consultation, lack of fixed terms, and budgetary approval by SHCP and Congress.
  - Principle 3: Broadly implemented — adequate powers and operating budgets reported, but loss of budgetary independence in 2000 leaves potential future constraint.
  - Principle 4: Broadly implemented — transparency improved (draft secondary regulations published for 20 days via COFEMER), issuance of Circular Única for Issuers (March 2003) and for Market Intermediaries (2004); remaining issues in discipline transparency and publication of clarifications.
  - Principle 5: Implemented — staff prohibited from direct ownership of individual securities; independence of internal control (Internal Comptroller); civil service reform in 2003; legal defense fund for staff (employees must reimburse fund if they lose).

### Principles of Self-Regulation (6–7)
- SROs recognized include: Bolsa, MexDer, AMIB, AMAII, INDEVAL, ASIGNA.
  - AMAII: voluntary, 25 members out of 45 registered independent advisers; contracted big four accounting firm for eight inspections annually.
  - INDEVAL: central securities depository; owns CCV central counterparty; periodically audited by CNBV.
  - Bolsa: monitors trading, imposes trading halts when a stock moves more than 15 percent intraday; reviews prospectuses but lacks authority to compel testimony.
- Assessment:
  - Principle 6: Implemented — multiple SROs exist but none have investigative or disciplinary authority.
  - Principle 7: Implemented — SRO rules reviewed and can be vetoed by CNBV; overlapping oversight (CNBV, SHCP, BOM) can impede innovation.

### Principles for the Enforcement of Securities Regulation (8–10)
- Inspection, investigation, surveillance:
  - CNBV conducts annual reviews of all 29 registered securities firms.
  - 34 mutual fund operators managing 425 funds; mutual fund inspections: initial onsite inspection at registration; annual audits; typically half of operators audited annually.
  - Written inspection reports and Letters of Observation issued; disciplinary fines common.
  - CNBV may demand documents and testimony from auditors, attorneys, others; may impose fines, suspensions, industry bars; cannot order restitution to compensate defrauded investors; administrative sanctions challengeable in court.
  - Surveillance: Bolsa and CNBV halt trading when intra-day moves exceed 15 percent.
- Assessment:
  - Principles 8–10: Implemented — comprehensive inspection and enforcement framework; remaining limits include inability to obtain restitution and improvements needed in due process for disciplinary proceedings.
- Notable procedural and timing points:
  - As of February 2006, no final sanctions had been imposed based upon an investigation or inspection in 2005.
  - CNBV may require corrective action identified in inspections; publication of disciplinary actions limited to basic notices; delayed disclosure when sanctions are challenged in court.

### Principles for Cooperation in Regulation (11–13)
- Information sharing authority expanded in 2001 and by the 2005 law.
  - Article 25 (2001 reforms) and Articles 192 and 358 (2005 law) expand CNBV authority to obtain and share supervisory and investigative information.
  - Mexico is a signatory to the IOSCO Multilateral MOU following a peer review.
  - Formal MOUs exist among CNBV, CNSF, CONSAR, and AML Intelligence unit in SHCP; separate MOU with BOM.
- Assessment:
  - Principles 11–13: Implemented — CNBV may share public and nonpublic information with foreign regulators under MOUs; limitation remains where CNBV cannot obtain information on behalf of foreign regulators if not related to conduct violating Mexican law.

### Principles for Issuers (14–16)
- Disclosure and corporate governance:
  - CNBV disclosure system: periodic reports, prospectuses, material event reports filed electronically on EMISNET; material thresholds: actions or related party transactions involving 10 percent of company assets or 25 percent of company revenues.
  - Filing timetables: audited annual financial statements in Mexican GAAP no later than three working days after approval by the annual general shareholders’ meeting; unaudited quarterly financial statements filed within 20 (first, second, third quarters) or 40 (last quarter) subsequent working days; standardized annual report due by June 30 of the following year.
  - Tender offer rules: purchasers of 10 percent must notify CNBV and Bolsa; acquisitions of 30 percent or more must be effectuated by a tender offer; partial tender offers minimum 10 percent; tender offer price must be the same, pro rata, for all classes.
  - New corporate vehicles under 2005 law: SAPI (quasi-public) and SAPI B (three-year transitional status to Bolsa listing); SAPI investors limited to up to 100 qualified individual investors (qualified defined as approximately US$450,000 investable net worth and annual income greater than approximately US$150,000).
  - Debt instrument: certificado bursátil (CB) introduced; CNBV reviews all debt offerings by subsovereign governments and state-owned entities.
  - Corporate governance enhancements in 2001 and 2005:
    - Board independence: at least 25 percent independent directors (2001); audit committees required (2001); audit committee now 100 percent independent (2005).
    - Comisario eliminated for listed companies (2005); audit committee replaces comisario duties.
    - Board/CEO responsibilities and fiduciary duties (due care and duty of loyalty) codified (2005).
    - Private derivative litigation threshold reduced to 5 percent (2005) (previously 20 percent).
- Assessment:
  - Principles 14–16: Implemented — disclosure regime strong and CNBV prospectus review improved; substantial minority shareholder protections implemented; monitoring recommended for tender offer price rule effects and for SAPI/SAPI B regulator action by June 2006.
- Key numeric and timing points:
  - 132 listed companies; 155 equity securities listed.
  - CNBV internal policy: staff comments to prospective issuers sent within eight days after filing; CNBV began publishing comments on its website.
  - Tender offer thresholds and disclosure levels: 10 percent, 30 percent, additional 5 percent.

### Principles for Collective Investment Schemes (17–20)
- Mutual funds regime:
  - 2001 Mutual Funds Law: CNBV registers and regulates operators, distributors, and marketers; operators: 34 registered fund operators (23 affiliated with a holding company, bank or broker); seven registered distributors.
  - Ongoing regulation: weekly portfolio holdings reports to CNBV; annual inspections and audits; independent price vendors and valuators required for NAV computation.
  - Investment restrictions: equity funds may not short stocks or purchase derivatives; repos and long-term debt funds must be rated; funds must publish portfolio holdings and file weekly portfolio reports.
  - Structural rules: fund operators must be legal entities separated from banks or securities firms; fund Boards minimum one-third independent directors.
- Assessment:
  - Principles 17–20: Implemented — hybrid disclosure and prudential/merit constraints; CNBV should consider re-examining categorization and restrictions, finalize secondary regulations to permit derivatives where appropriate, review price vendor activities, and consider authority to suspend redemptions.
- Key numeric items:
  - Mutual funds: 34 operators managing 425 funds.
  - AMAII membership: 25 members out of 45 registered independent advisers.
  - Audit firm independence: prohibition on an audit firm receiving more than 10 percent of its revenue from one client; compulsory signing-partner rotation every five years.
  - Valuation issues: INDEVAL reports .5 percent failure rate on settlements.

### Principles for Market Intermediaries (21–24)
- Licensing and prudential framework:
  - Responsibility for securities firm licensing transferred from SHCP to CNBV in 2005; 29 registered securities firms.
  - Associated persons must pass AMIB qualifications exam; AMIB administers licensing exams for employees selling securities and mutual funds.
  - Capital and reporting: daily electronic position reports; monthly capital reports; CNBV reviews positions; firms must satisfy intraday margin/capital instructions; AMIB may fine for reporting failures.
  - Risk and compliance: AMIB requires risk management officers and compliance officers; firms must segregate customer funds at INDEVAL.
  - Limited-function brokers: 2005 reforms authorize CNBV to license limited function brokers (25 permitted activities identified); CNBV to draft implementing regulations.
  - Failure procedures: CNBV may appoint third-party administrator for failed firms; administrator selected from three persons submitted by AMIB; after nine months unresolved, CNBV may revoke license.
- Assessment:
  - Principles 21–24: Implemented — initial and ongoing capital requirements set by CNBV; consolidated monitoring beginning; suggestion to develop qualification exams for risk and compliance officers.
- Key numeric and procedural points:
  - 25 permitted activities for limited-function brokers.
  - Four clearing members dominate MexDer; 20 nonclearing members.
  - Clearing member collateral example: MexDer/ASIGNA clearing members required to pledge collateral valued at 750 million pesos.
  - CNBV budget typically represents approximately 80 percent of fees to be collected.

### Principles for the Secondary Market (25–30)
- Market structure and supervision:
  - Main markets: Bolsa (equity), MexDer (derivatives/futures), OTC government debt market.
  - Bolsa characteristics:
    - Member-owned for-profit corporation; controlling shareholder of MexDer.
    - Fully electronic market; priority to customer orders; normal orders must be exposed within five minutes (reduced from 20 minutes in 2001).
    - Trading halt rule: 15 percent intraday price movement.
    - Global Mercado (launched 2003) for foreign equities: exposures of 20 seconds, 5 percent allocation to superior offers; cleared through INDEVAL omnibus account at Deutsche Bank (estimated US$2 billion custodial value). Global Mercado comprises daily 10-30 percent of Bolsa trading.
    - Listed: 132 companies, 155 equity securities; many large companies dually listed and most trading occurs off Bolsa.
  - MexDer:
    - Licensed by SHCP in consultation with CNBV and BOM; controlled by Bolsa.
    - Interest rate futures account for approximately 90 percent of daily volume.
    - Four clearing members (trusts) dominate; ASIGNA central counterparty; margins typically 5-10 percent; T+1 clearing.
  - Government debt market:
    - Dominant market segment: more than 90 percent of daily activity for government debt across markets; approximately 60 percent of government debt activity occurs via repo transactions.
    - Two interdealer brokers: SIF (owned by Bolsa) and Reuters; BOM is primary overseer; daily transaction reporting made by banks to BOM (aggregate published next day).
    - Repos of three days or longer cleared through INDEVAL; one- or two-day repos settled bilaterally outside INDEVAL.
  - Clearing and settlement:
    - INDEVAL and CCV (equities) subject to CNBV review and onsite examinations twice yearly.
    - CCV dynamic collateral monitoring: three-day open positions, 500 day moving average; collateral calls with 30 minute cure window; reported occurrence: call not satisfied only eight times in two years.
    - INDEVAL upgrading systems toward straight-through processing late 2006.
    - Settlement cycles: Bolsa equities T+2 via INDEVAL; Global Mercado cross-border settlement issues due to U.S. T+3 vs Mexico T+2.
- Assessment:
  - Principles 25–30: Implemented — oversight and systems largely sound; remaining concerns include limited equity market liquidity, debt market transparency, one- and two-day repo processing outside INDEVAL, concentration in MexDer clearing members, and Global Mercado exposure rules (20-second exposure, 5 percent allocation) that may inhibit true price competition.
- Key numeric/system facts:
  - Bolsa capacity upgraded to handle spikes up to ten times recent peak periods.
  - CCV collateral requirement example: clearing firms must maintain intraday margin of at least 75 percent of daily collateral.
  - INDEVAL failure rate: .5 percent on settlements largely due to T+2/T+3 mismatches.
  - ASIGNA margin collateral requirement: 750 million pesos per clearing member.

### Key recommended actions (selected/high-level)
- Regulator independence and governance:
  - Consider budgetary independence for CNBV and creation of fixed-term Board appointments; reduce areas requiring formal consultation with other governmental entities.
  - Increase transparency and due process protections in CNBV disciplinary process.
- SROs and market innovation:
  - Streamline overlapping oversight that impedes futures market innovation.
- Enforcement and investor redress:
  - Continue development of CNBV enforcement program; better utilize authority to publicize enforcement to educate market participants.
  - Consider mechanisms to allow restitution to defrauded investors (current CNBV powers do not include ordering restitution).
- Cooperation and information sharing:
  - Address remaining limitation where CNBV cannot obtain information on behalf of foreign regulators absent a nexus to Mexican law violations.
  - Promote further information sharing among Mexican financial regulators.
- Issuers and accounting/audit oversight:
  - CNBV to emphasize review of financial statements and accounting issues in disclosure reviews.
  - Adopt secondary regulations for SAPI and SAPI B in time for June 2006 effective date.
  - Monitor tender offer pricing rules to ensure they do not act as a statutory "poison pill."
  - Examine and, if necessary, update Mexican auditing standards consistent with international norms and 2005 law changes.
- Collective investment schemes:
  - Re-examine mutual fund categorization and investment restrictions; finalize secondary regulations enabling derivatives investing if appropriate.
  - Review price valuator operations and consider secondary regulation on alternative pricing methodology and triggers for use.
  - Resolve insurance products marketed as mutual funds with CNSF.
- Market intermediaries and risk management:
  - Finalize CNBV secondary regulation on licensing limited-function securities firms.
  - Encourage AMIB to develop certification tests for compliance and risk management officers.
  - Formalize consolidated supervision of affiliated banks and brokers.
- Secondary market and settlement:
  - Examine objectives and costs/benefits of Global Mercado and its tax incentives.
  - Improve price transparency in the debt market (expanded access to quotations and timely last-sale reporting).
  - Address processing and legal uncertainties arising from one- and two-day repo transactions not cleared through INDEVAL.
  - Consider cost-benefit analysis of building a central counterparty for the debt market.

*Source: IMF staff assessment as contained in the document _cr07168 (IOSCO Principles assessment and recommended action plan); canonical source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07168.pdf*

### 43. The authorities noted that the assessment of compliance with the IOSCO Objectives

### _cr07168 - 43. The authorities noted that the assessment of compliance with the IOSCO Objectives

### Assessment of compliance with IOSCO Objectives and Principles
- The authorities noted that the assessment of compliance with the IOSCO Objectives and Principles for Securities Regulation provides an adequate evaluation of the implementation by the National Banking and Securities Commission (CNBV) of the Principles.
- They were confident that the New Securities Market law will constitute a very sound framework upon which we will continue our efforts towards the development of the securities markets.

### CNBV autonomy and legislative priorities
- As in the case of banking, the authorities considered that the broad challenge ahead remains the achievement of an autonomous status for the CNBV.
- Although a significant reallocation of powers among financial authorities has already taken place in the securities field, the CNBV enphasized that it must maintain its efforts in bringing proposals to the legislative branch that will ensure an independent supervisor in accordance with international best practices.

*Source: _cr07168 - 43. The authorities noted that the assessment of compliance with the IOSCO Objectives*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07168.pdf_