## _cr1265

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---

### Major findings
- Mexican banking system is profitable, liquid, and well capitalized; stress tests suggest it is able to withstand severe shocks.
- Authorities plan to introduce Basel III capital requirements in 2012.
- Hidden vulnerabilities may surface; continuous monitoring of emerging risks is recommended.
- Many developmental challenges remain for the financial system to contribute to more rapid and equitable growth.
- FSAP assessments evaluate system-wide stability, not risks specific to individual institutions (asset quality, operational or legal risks, or fraud).

### Regulation, supervision, and oversight — key issues & institutional recommendations
- Need for greater independence and budget autonomy for financial sector supervision:
  - Supervisory agencies lack authority to amend organizational structures, make key staffing decisions, or modify budgets.
  - No defined appointment period for, nor clear grounds for dismissal of, senior officers; inadequate legal protection for staff.
  - Below-market salaries have led to high staff turnover.
- Consider revisiting supervisory architecture:
  - Reorganize roles and responsibilities, including separating prudential and market-conduct roles and better aligning central bank and CNBV responsibilities for emergency liquidity provision.
- Consolidated supervision and Pillar 2:
  - Urgent full implementation of Pillar 2 (supervisory review) to provide tools to require buffers above regulatory minima and to link ICAAP to supervisory outcomes.
  - Extend CNBV powers to regulate financial and mixed-activity groups; apply prudential regulation, risk limits, and governance to holding companies.
- Licensing, sanctions, and legal protections:
  - Strengthen fit-and-proper and UBO identification; tighten sanctions regime and remove legal restrictions on disclosure of enforcement where appropriate.
  - Institute legal protection (statutory immunity) for supervisors for bona fide actions.

### Concentration, conglomeration, and market structure
- High concentration and conglomeration pose systemic and competition risks:
  - Seven largest financial groups hold or manage about three-quarters of total financial assets; seven banks account for 82 percent of bank assets.
  - The three largest banks account for 55 percent of bank assets.
  - Seven large financial groups control or manage about 73 percent of all financial assets.
  - Seven largest banks: 5 are foreign-owned subsidiaries.
- Recommendations:
  - Tighten concentration limits and introduce a capital charge for concentration risk under Pillar 2.
  - Regulate mixed-activity groups and address related-party transactions and conflicts of interest.

### Crisis management, liquidity management, safety net, and resolution
- Recommended improvements to safety net and crisis framework:
  - Disclose broad features of emergency liquidity assistance (ELA) and consult Financial Stability Committee (FSSC) on systemic importance of ELA applicants.
  - Add liquidity indicators as triggers in the prompt corrective action (PCA) regime.
  - Shorten delays in revoking a bank license and reduce appeals-process delays that may impede timely intervention.
  - Strengthen IPAB by: gradual transfer of its legacy debt service to SHCP; set up contingency lines of credit with SHCP guarantee; and consider lowering deposit coverage.
  - Establish emergency contingency funding mechanism for IPAB, guaranteed by SHCP; transfer IPAB’s debt to the Federal Government.
  - Channel entire bank liquidation through an administrative process to preserve residual value; adopt implementing procedures for purchase-and-assume (P&A) resolution methods and allow partial transfer of liabilities.

### Stress testing and resilience
- Multiple stress-testing exercises by CNBV, BoM, and FSAP team covered credit, market, liquidity, and contagion risks; results indicate adequate capital under tested scenarios.
- FSAP top-down stress test:
  - Modeled 10 largest banks (accounting for 84 percent of the Mexican banking system).
  - Included WEO baseline and two adverse scenarios for 2012–2013:
    - Adverse Scenario 1: slower but positive U.S. growth.
    - Adverse Scenario 2: U.S. recession.
  - Under adverse Scenario 2 with large bank-specific shocks each quarter, banking system profitability remains sufficiently high; only three banks would post declining CAR ratios in scenario 2 when they retain all earnings.
- BoM stress test (September 2011):
  - Contagion: losses rose from about 8.2 percent of system capital without contagion to around 13 percent under a common-macroeconomic-shock contagion exercise.
  - Credit stress assumptions: default probabilities tripled over 18 months; interest income reduced by 80 percent; recovery rates halved — system average CAR falls by nearly 7 percentage points but remains above the regulatory minimum.
- Caveats:
  - Macro factors in bank profit models explain 23 percent of sample variation; bank-specific residuals parameterize idiosyncratic shocks.
  - Zero risk-weighting of banks’ holdings of government securities was not modified or stress-tested.

### Crisis cross-border and systemic considerations
- Subsidiaries of large foreign banks play a major role; home-host cooperation is key.
- Pending G-20/FSB outcomes could affect the financial system:
  - Capital requirements for counterparty and sovereign risk.
  - G-SIFI surcharges.
  - Principles for cross-border coordination and bank resolution protecting local subsidiaries.
- Cross-border resolution and OTC derivatives:
  - Ensure Memoranda of Understanding (MoU), supervisory/crisis-management colleges, access to recovery and resolution plans, and cross-border crisis simulations.
  - Monitor global OTC derivatives reform and assess mutual recognition regimes for trade repositories and CCPs.

### Key short-term and medium-term recommended actions (select highlights)
- Short Term:
  - Increase budget autonomy for CNBV and CNSF; increase resources commensurate with wider regulatory perimeter.
  - Extend CNBV regulatory and supervisory powers to financial and mixed-activity groups.
  - Fully implement Pillar 2 processes, including ICAAP and criteria to require buffers above regulatory minima.
  - Tighten concentration limits and introduce capital charge for concentration risk under Pillar 2.
  - Establish emergency contingency funding mechanism for IPAB, guaranteed by SHCP; transfer IPAB’s debt to Federal Government.
  - Change pension fund guidelines to focus on long-term returns and improve derivatives legal framework.
  - Establish program to address weak and not-yet-regulated cooperatives.
  - Revisit commission structures and ensure bank account contestability.
- Medium Term:
  - Enhance independence and accountability of CNBV and CNSF; revisit supervisory architecture.
  - Strengthen powers and resources at CONDUSEF and study allocation of responsibilities with PROFECO.
  - Increase replacement rates at retirement.
  - Promote greater competition for mutual fund providers; foster regional capital market integration.

### Structural and market-development recommendations
- Capital markets and corporate financing:
  - Reform mutual fund industry; increase controls on related-party transactions; create a hybrid public offering regime; encourage new issuers; introduce a legal framework for derivatives; increase regional integration.
- Pensions and annuities:
  - Raise pension contributions to achieve reasonable replacement rates; refocus regulation on long-term performance; restore competition in private annuities by relaxing pricing/technical restrictions.
- Housing finance and securitization:
  - Ensure level playing field between government agencies and private sector; revive private securitization market.
- Credit reporting and retail commissions:
  - Standardize credit reporting, expand data scope, enhance oversight to eliminate conflicts of interest (banks owning and using credit bureaus), and improve information sharing.

### Banking system condition and key statistics (system-wide indicators, as of June 2011 unless indicated)
- Regulatory capital to risk-weighted assets: 16.5 percent.
- Regulatory Tier 1 capital to risk-weighted assets: 14.3 percent.
- Capital to assets: 9.8 percent.
- Liquid assets to total assets: 43.3 percent (Table 6 shows 43.3 for 2010 and 43.6 for 2011 1/).
- Nonperforming loans to total gross loans: 2.3 percent (as of June 2011 1/).
- Return on assets: 1.6 percent (2011 1/).
- Return on equity: 16.0 percent (2011 1/).
- Commercial bank loans to sub-national governments and public enterprises, and holdings of government securities, represent about a quarter of total bank assets.
- Smaller banks represent 15 percent of banking assets.

### Risk Assessment Matrix — selected risks, likelihoods, expected impact, rationale
- Distress in foreign parent banks of large Mexican subsidiaries:
  - Likelihood: Medium
  - Expected impact: Low
  - Rationale: Mexican subsidiaries well capitalized and liquid; large low-cost domestic deposit base; tightened related party lending restrictions; BoM liquidity facilities and large pools of domestic government paper.
- U.S. economy slow-down (double-dip recession or protracted slow GDP growth):
  - Likelihood: High
  - Expected impact: Medium
  - Rationale: Impacts exports, GDP growth, remittances; could increase unemployment and BOP pressures; forward-looking provisioning and well-capitalized banks mitigate spillovers.
- Solvency problems in a number of smaller banks affecting confidence:
  - Likelihood: Low-Medium
  - Expected impact: Low-Medium
  - Rationale: Smaller banks represent 15 percent of assets; IPAB might need government support if insured deposits exceed fund.
- Severe deterioration of banks’ loan portfolios (consumer, corporate and sub-national):
  - Likelihood: Medium
  - Expected impact: Low
  - Rationale: Profitability would decline and provisions and capital buffers drawn down; consolidation or exit possible for small banks with concentrated portfolios.

### Macroeconomic outlook and selected indicators (extracts from Table 3)
- Real GDP: 2007: 3.4; 2008: 1.2; 2009: -6.3; 2010: 5.8; 2011: 3.7; 2012 (Proj.): 3.4
- Net exports (contribution): 2007: -0.6; 2008: -0.7; 2009: 2.1; 2010: 0.0; 2011: 0.3; 2012 (Proj.): 0.5
- Total domestic demand: 2007: 3.7; 2008: 1.9; 2009: -8.0; 2010: 5.1; 2011: 3.3; 2012 (Proj.): 3.0
- Exports, f.o.b.: 2007: 8.8; 2008: 7.2; 2009: -21.2; 2010: 29.9; 2011: 26.2; 2012 (Proj.): 5.2
- Consumer prices (end of year): 2007: 3.8; 2008: 6.5; 2009: 3.6; 2010: 4.4; 2011: 3.3; 2012 (Proj.): 3.0
- Unemployment rate (annual average): 2007: 3.7; 2008: 4.0; 2009: 5.5; 2010: 5.4; 2011: 5.2; 2012 (Proj.): 4.8
- Government Revenue (percent of GDP): 2007: 21.3; 2008: 23.0; 2009: 22.3; 2010: 22.0; 2011: 21.6; 2012 (Proj.): 21.9
- Government Expenditure (percent of GDP): 2007: 22.5; 2008: 24.1; 2009: 27.0; 2010: 26.3; 2011: 24.6; 2012 (Proj.): 24.7
- Augmented balance: 2007: -1.2; 2008: -1.1; 2009: -4.7; 2010: -4.3; 2011: -3.0; 2012 (Proj.): -2.8
- Gross public sector debt (percent of GDP): 2007: 37.8; 2008: 43.1; 2009: 44.7; 2010: 42.9; 2011: 43.1; 2012 (Proj.): 44.2
- Net international reserves (In billions of U.S. dollars): 2007: 78.0; 2008: 85.4; 2009: 90.8; 2010: 113.6; 2011: 145.6; 2012 (Proj.): 155.6
- Gross external debt (percent of GDP, end of period): 2007: 19.0; 2008: 18.5; 2009: 22.2; 2010: 23.8; 2011: 23.3; 2012 (Proj.): 22.8
- Crude oil export price, Mexican mix (US$/bbl): 2007: 61.6; 2008: 84.4; 2009: 57.4; 2010: 72.3; 2011: 94.5; 2012 (Proj.): 91.5

### Payment systems, SPEI, DALI, SIAC, and securities infrastructure — findings & recommendations
- SPEI operational features:
  - Near real-time hybrid settlement system operated by BoM; multi-lateral offsetting algorithm runs roughly every 20 seconds; opens at 7:00 p.m. on previous banking business day until 5.30 p.m. of the value date.
  - Messaging: proprietary format over BoM-operated private network using TCP/IP; backup via internet; messages digitally signed (PKI) and encrypted.
  - Business continuity: recovery target within 120 minutes; fully functional secondary site with real-time backups.
- Integration and settlement:
  - SPEI, DALI, and SIAC closely integrated; participants can transfer balances online among SPEI, SIAC, DALI cash accounts.
  - DALI settles operations in DVP model 3 frequently and runs clearing/settlement cycles at least every 2 minutes; longer DALI operating hours recommended.
- System statistics (selected)
  - DALI
    - 2010 Volume (millions): 499.8
    - 2010 Value (in trillions MXN): 2.3
    - 2011 (Jan-Aug 2011) Volume (millions): 499.6
    - 2011 (Jan-Aug 2011) Value (in trillions MXN): 1.78
  - SPEI
    - 2009 Volume (millions): 62.2
    - 2009 Value (in trillions MXN): 128.5
    - 2010 Volume (millions): 85.8
    - 2010 Value (in trillions MXN): 153.1
    - 2011 (Jan-Aug 2011) Volume (millions): 69.8
    - 2011 (Jan-Aug 2011) Value (in trillions MXN): 115.7
- Oversight and compliance:
  - BoM has designated SPEI, SIAC, and DALI as systemically important; SPEI fully observes 9 of 10 CPSS CPSIPS principles; SIAC and DALI largely compliant with some gaps.
  - No formal MOU between BoM and CNBV for oversight of all payments and securities settlement systems; formal collaboration mechanisms recommended (e.g., via FSSC sub-committee).
- Recommended payment/securities actions (select):
  - Consider closer integration of cash settlement accounts in SIAC and DALI with SPEI; assess moving SIAC/DALI settlement into SPEI.
  - Strengthen BCP arrangements by requiring participant certification.
  - Conduct cost-benefit assessments for shorter corporate securities settlement cycles and for CCP arrangements for government securities.
  - Address DALI data-replication gaps: ensure online replication or detailed procedures to avoid transaction loss between replications.

### Securities markets, BMV, MexDer, and IOSCO/market supervision highlights
- Market structure and liquidity:
  - 154 listed domestic companies and ETFs.
  - Market capitalization increased 30 percent over five years; trading volumes up 131 percent (to US$453 million and US$79,986 million, respectively).
  - Trading concentrated: five most active issues made up 68 percent of total traded value in 2011.
  - Only about 30–40 domestic stocks considered liquid (estimates vary).
- SIC (Sistema Internacional de Cotizaciones):
  - Total listings increased by more than 200 percent (from 205 to 649); ETFs increased 471 percent (from 55 to 314).
  - SIC trading highly concentrated; five ETFs made up 58 percent of traded value in 2011.
- Derivatives market (MexDer):
  - Listed options up 450 percent—from 980 to 5,468.
  - Options trading volumes up 36 percent; futures trading volume declined 85 percent.
- IOSCO assessment — selected supervisory gaps and recommendations:
  - CNBV has broad authority over securities markets, but derivatives authority is unclear; dedicated derivatives legislation or amendments to capital markets law recommended.
  - CNBV operational independence compromised by funding constraints, Board composition (SHCP appoints 10 of 13 members), and lack of statutory immunity.
  - Enhance CNBV powers: surprise inspections, power to order restatements, power to intervene in mutual fund sales/redemptions, and to settle disciplinary matters.
  - CONDUSEF lacks resources and powers to function effectively as consumer protection agency; strengthen arbitration and consumer protection mechanisms.

### Insurance and pensions — IAIS assessment and recommendations
- Insurance supervision:
  - Comprehensive legal and institutional framework; new insurance law (LISF) submitted to Congress in September 2011 expected to improve IAIS compliance.
  - CNSF reputation and compliance high; proposed LISF would increase observance of ICPs.
  - Concerns: CNSF lack of independence and budget autonomy; appointment procedures for leadership not codified; salary freezes undermining talent retention.
  - Asset-liability mismatches: reported mismatch of 5 years and 12 years in domestic and foreign currency; mismatch of about 15 years in indexed currency.
  - Recommendations: adopt Solvency II–type regime calibrated to Mexican circumstances; enhance inspection intrusiveness and resources; provide guidance on reinsurance recoveries and assets backing catastrophic reserves.
- Pensions and annuities:
  - Raise contribution rates to achieve reasonable replacement rates; focus regulation on long-term performance; relax restrictions to restore competition in private annuities.

### Developmental issues and legal/institutional constraints
- Public debt management improvements: lengthened maturities, improved composition; further disclosure on ownership categories recommended.
- Financial depth low: credit to GDP about 20 percent at end-2010; financial intermediation low relative to peers.
- Legal/institutional constraints impede development:
  - Weak property rights; complex insolvency and creditor rights; inefficient and corrupt judicial system; insufficient transparency in financial information.
  - These increase bank risks, raise loss-given default, increase spreads, and restrict access—especially for SMEs.
- Credit reporting:
  - Two bureaus expanded coverage but market remains fragmented; recommendations: standardize information, integrate players/products, strengthen oversight, expand data scope (government programs, court judgments, fraud alerts, property registries).

_Prepared by the Monetary and Capital Markets and Western Hemisphere Departments; Financial System Stability Assessment and IMF staff reports summarized from the supplied document excerpt._

### 2011. The views expressed in this document are those of the staff team and do not necessarily reflect

### Financial System Stability Assessment — Mexico (Financial Sector Stability Assessment, December 7, 2011)

### Major findings
- The Mexican banking system is profitable, liquid, and well capitalized, and stress tests suggest that it is able to withstand severe shocks.
- Authorities plan to introduce Basel III capital requirements in 2012.
- Hidden vulnerabilities may surface and authorities should monitor emerging risks on a continuous basis.
- Many developmental challenges remain for the financial system to fully contribute to more rapid and equitable growth.
- FSAP assessments are designed to assess the stability of the financial system as a whole and not that of individual institutions; they do not cover risks specific to individual institutions such as asset quality, operational or legal risks, or fraud.

### Team and mission
- Prepared by the Monetary and Capital Markets and Western Hemisphere Departments.
- Approved by José Viñals and Nicolás Eyzaguirre on December 7, 2011.
- The FSAP Update missions were conducted in Mexico City in September and October 2011.
- Mission team included: Fernando Montes-Negret (Mission Chief, IMF), Lily Chu (Mission Chief, World Bank), Francesco Columba, Karl Driessen, Joaquin Gutierrez-Garcia, Ivan Luis Oliveira, Ryan Scuzzarella, Rodolfo Wehrhahn (all IMF/MCM), Enrique Flores Curiel (WHD/IMF); Mariano Cortes, Pierre-Laurent Chatain, Clemente del Valle, Heinz Rudolph, Patricia Caraballo, Massimo Cirasino (all World Bank); Olivier Hassler, Paul Kupiec, Ignacio Mas, Tanis McLaren, and José Rutman (experts).

### Regulation, supervision, and oversight — key issues
- Greater independence and budget autonomy are needed for financial sector supervision to consolidate recent gains.
  - Supervisory agencies lack authority to amend organizational structures, make key staffing decisions, or modify budgets.
  - There is no defined appointment period for, nor clear grounds for dismissal of, senior officers, or adequate legal protection for staff.
  - Below-market salaries have led to high staff turnover.
  - The regulatory perimeter is expanding, increasing supervisory demands.
- High level of concentration and conglomeration in Mexico’s financial system creates potential conflicts of interest in supervised entities and hidden risks.
  - Implementation of Basel II’s Pillar 2 is urgently needed to provide additional supervisory tools, including the ability to require buffers above regulatory minima.
  - Consolidated supervision should be strengthened by giving CNBV powers to regulate financial groups.

### Liquidity management, safety net, and resolution — recommended improvements
- Areas for improvement identified in the financial sector safety net include:
  - (i) Disclosing the broad features of emergency liquidity assistance.
  - (ii) Adding liquidity indicators as triggers in the prompt corrective action regime.
  - (iii) Shortening delays in revoking a bank license.
  - (iv) Strengthening the deposit guarantee fund by: a gradual transfer of its legacy debt service to government; setting up contingency lines of credit with government guarantee; and lowering deposit coverage.

### Cross-border and systemic considerations
- Subsidiaries of large foreign banks play a major role in Mexico; thus, home-host cooperation is key.
- Outcomes on pending G-20/FSB issues could have a significant effect on the financial system, including:
  - Capital requirements for counterparty and sovereign risk.
  - Globally systemically important financial institutions (G-SIFI) surcharges.
  - Principles for cross-border coordination and bank resolution that protect the integrity of local subsidiaries.

### Stress testing and resilience
- Stress tests performed by the team suggest the banking system is able to withstand severe shocks (stress testing methodology and results are further detailed in the FSAP).
- The report notes the importance of continuous monitoring for emerging risks despite favorable stress test outcomes.

### Developmental issues
- Many developmental challenges remain for the financial system to support more rapid and equitable growth (specific developmental topics are addressed in the FSAP’s Developmental Issues chapter).

*Prepared by the Monetary and Capital Markets and Western Hemisphere Departments; Financial System Stability Assessment, December 7, 2011.*

### 18. Recommended Actions to Improve Observance of CPSS-IOSCO RSSS—DALI and

### 18. Recommended Actions to Improve Observance of CPSS-IOSCO RSSS—DALI and INDEVAL

### Executive summary — systemic resilience and vulnerabilities
- Mexico was hit hard by the global financial crisis; economic activity fell sharply in 2009 and financial markets experienced severe stress.
- Unregulated housing finance companies failed and banks experienced significant losses in their credit card portfolios, but spillovers to the broader system were contained.
- The economy and financial system recovered in 2010 on the back of sound policy responses and fundamentals; growth remained robust in the first half of 2011.
- The Mexican banking system is described as profitable, liquid, well capitalized, and stress tests suggest it is able to withstand severe shocks.
- Authorities introduced Basel III capital requirements in 2012, ahead of many other countries.

### Institutional and supervisory recommendations
- Financial supervision would benefit from greater independence and budget autonomy:
  - CNBV and CNSF lack authority to make key staffing decisions or modify their budgets.
  - No defined appointment period for, nor clear grounds for dismissal of, senior officers; inadequate legal protection for staff.
  - Below-market salaries lead to high staff turnover.
- Consideration should be given to a new supervisory architecture:
  - Reorganize roles and responsibilities, including separating prudential and market-conduct roles, to reduce overlaps and better align central bank and CNBV responsibilities for emergency liquidity provision.
- Strengthen consolidated supervision and group-level regulation:
  - Extend CNBV powers to regulate financial and mixed-activity groups.
  - Prudential regulation—especially risk limits—and risk governance and management standards should be extended to the holding company level.
  - Regulate mixed-activity groups to address concentration and other risks.
  - Home-host cooperation is essential given the role of subsidiaries of large foreign banks.

### Concentration, conglomeration, and Pillar 2 implementation
- High level of concentration and conglomeration and foreign ownership pose challenges:
  - Seven largest financial groups hold or manage about three-quarters of total financial assets.
  - Concentrated loan portfolios increase credit and contagion risk.
- Urgent full implementation of Pillar 2 (supervisory review) is recommended:
  - Provide supervisors ability to require buffers above regulatory minima.
  - Include ICAAP and other supervisory processes.

### Crisis management and safety nets
- Mexico’s crisis management framework has been substantially upgraded since the last FSAP, but further improvements are needed:
  - Disclose basic features of Bank of Mexico’s (BoM) emergency liquidity assistance (ELA) framework.
  - Consult the Financial Stability Committee (FSSC) on systemic importance of institutions requesting ELA access.
  - Add liquidity indicators as triggers in the prompt corrective action (PCA) regime.
  - Shorten delays in revoking a bank license.
  - Strengthen IPAB by: gradual transfer of its legacy debt service to SHCP; operationalize BoM contingency lines of credit (with SHCP guarantee); lower deposit coverage.
  - Channel entire bank liquidation through an administrative process to preserve banks’ residual value.

### Structural and market-development recommendations
- Address legal and institutional barriers limiting maturity transformation and risk taking:
  - Reform mutual fund industry to foster competition.
  - Increase controls on related party transactions.
  - Create a hybrid regime within the public offering framework to increase supply of securities and allow institutional investors to invest in specialized instruments.
  - Set up a comprehensive program to encourage new issuers.
  - Introduce a legal framework for derivatives.
  - Increase regional capital market integration.
- Pension and annuities adjustments:
  - Raise pension contributions to achieve reasonable replacement rates.
  - Adjust regulatory approaches to focus on long-term investment performance.
  - Restore competition in private annuities by relaxing restrictions on pricing and technical parameters.
- Housing finance and securitization:
  - Ensure a more level playing field between government agencies and the private sector.
  - Revive the private securitization market.
- Credit reporting and retail commissions:
  - BoM should review policies on retail commissions to maximize access to finance.
  - Streamline credit reporting by further standardization of information, increasing scope of data collected, better oversight to eliminate conflicts of interest (banks owning and using credit bureaus), and enhance information sharing between credit bureaus.

### Key short-term and medium-term recommendations (select from Table 1)
- Short Term:
  - Increase budget autonomy for CNBV and CNSF; increase resources commensurate with new responsibilities (wider regulatory perimeter).
  - Extend scope of CNBV regulatory and supervisory powers to financial and mixed-activity groups.
  - Fully implement Pillar 2 supervisory processes, including ICAAP and criteria to require buffers above regulatory minima.
  - Tighten concentration limits (including applicable standards) and introduce capital charge for concentration risk under Pillar 2.
  - Establish emergency contingency funding mechanism for IPAB, guaranteed by SHCP; transfer IPAB’s debt to the Federal Government.
  - Change pension fund investment guidelines and regulatory tools to encourage focus on long term returns, including using long-term benchmarks.
  - Improve legal framework for derivatives.
  - Establish program to address weak and not yet regulated cooperatives.
  - Revisit the structure of commissions and ensure bank account contestability to promote access to finance.
- Medium Term:
  - Enhance independence and accountability of the CNBV and CNSF (including by revisiting supervisory architecture) and strengthen the legal protection of supervisors.
  - Strengthen powers and increase resources at CONDUSEF and study allocation of responsibilities with PROFECO.
  - Increase replacement rates at retirement.
  - Promote greater competition for mutual fund providers by facilitating entry by independent operators.
  - Promote regional integration of capital markets; prepare a medium-term strategy for capital market development.

### Risk Assessment Matrix — threats, likelihoods, expected impact
- Distress in foreign parent banks of the largest Mexican bank subsidiaries:
  - Likelihood: Medium
  - Expected impact: Low
  - Rationale: Mexican subsidiaries are well capitalized and liquid; large low-cost domestic deposit base; tightened related party lending restrictions; BoM liquidity facilities and large pools of domestic government paper.
- U.S. economy slow-down (double-dip recession or protracted slow GDP growth):
  - Likelihood: High
  - Expected impact: Medium
  - Rationale: Likely to impact Mexico’s exports, GDP growth and remittances; could increase unemployment and BOP pressures; forward-looking provisioning and well-capitalized banks mitigate spillovers.
- Solvency problems in a number of smaller banks affecting confidence:
  - Likelihood: Low-Medium
  - Expected impact: Low-Medium
  - Rationale: Smaller banks represent 15 percent of banking assets; IPAB might need government support if insured deposits exceed the insurance fund.
- Severe deterioration of banks’ loan portfolios (consumer, corporate and sub-national):
  - Likelihood: Medium
  - Expected impact: Low
  - Rationale: Past deterioration observed following 2007–2009; profitability would decline and provisions and capital buffers drawn down; consolidation or exit possible for small banks with concentrated portfolios.

### Macroeconomic outlook and selected indicators (extracts from Table 3)
- Real GDP: 2007: 3.4; 2008: 1.2; 2009: -6.3; 2010: 5.8; 2011: 3.7; 2012 (Proj.): 3.4
- Net exports (contribution): 2007: -0.6; 2008: -0.7; 2009: 2.1; 2010: 0.0; 2011: 0.3; 2012 (Proj.): 0.5
- Total domestic demand: 2007: 3.7; 2008: 1.9; 2009: -8.0; 2010: 5.1; 2011: 3.3; 2012 (Proj.): 3.0
- Exports, f.o.b.: 2007: 8.8; 2008: 7.2; 2009: -21.2; 2010: 29.9; 2011: 26.2; 2012 (Proj.): 5.2
- Consumer prices (end of year): 2007: 3.8; 2008: 6.5; 2009: 3.6; 2010: 4.4; 2011: 3.3; 2012 (Proj.): 3.0
- Unemployment rate (annual average): 2007: 3.7; 2008: 4.0; 2009: 5.5; 2010: 5.4; 2011: 5.2; 2012 (Proj.): 4.8
- Government Revenue (percent of GDP): 2007: 21.3; 2008: 23.0; 2009: 22.3; 2010: 22.0; 2011: 21.6; 2012 (Proj.): 21.9
- Government Expenditure (percent of GDP): 2007: 22.5; 2008: 24.1; 2009: 27.0; 2010: 26.3; 2011: 24.6; 2012 (Proj.): 24.7
- Augmented balance: 2007: -1.2; 2008: -1.1; 2009: -4.7; 2010: -4.3; 2011: -3.0; 2012 (Proj.): -2.8
- Gross public sector debt (percent of GDP): 2007: 37.8; 2008: 43.1; 2009: 44.7; 2010: 42.9; 2011: 43.1; 2012 (Proj.): 44.2
- Net international reserves (In billions of U.S. dollars): 2007: 78.0; 2008: 85.4; 2009: 90.8; 2010: 113.6; 2011: 145.6; 2012 (Proj.): 155.6
- Gross external debt (percent of GDP, end of period): 2007: 19.0; 2008: 18.5; 2009: 22.2; 2010: 23.8; 2011: 23.3; 2012 (Proj.): 22.8
- Crude oil export price, Mexican mix (US$/bbl): 2007: 61.6; 2008: 84.4; 2009: 57.4; 2010: 72.3; 2011: 94.5; 2012 (Proj.): 91.5

*Source: IMF staff report, “18. Recommended Actions to Improve Observance of CPSS-IOSCO RSSS—DALI and INDEVAL.”*

### 3.      The main macroeconomic risks for Mexico’s financial system are linked to U.S. and

### 3.      The main macroeconomic risks for Mexico’s financial system are linked to U.S. and

### Macroeconomic risk drivers
- Main external risks are linked to U.S. and European developments:
  - Strong real sector linkages with the U.S. due to high integration in manufacturing, high remittances, and tourism revenue.
  - Further turmoil in Europe could increase global investor risk aversion and emerging market risk premia.
  - Spanish bank subsidiaries account for about one-third of banking system assets; liquidity pressures on Spanish parents could lead subsidiaries to deleverage, impacting credit growth and economic activity in Mexico.
- Capital flow reversal is a concern given high dependence on non-resident investment and rising risk aversion.
- Domestic vulnerability: credit risk is the most important banking-sector vulnerability, with many banks heavily exposed to their largest borrowers (particularly smaller banks).

### Financial sector structure
- Financial intermediation and credit to the private sector in Mexico are among the lowest in Latin America and well below other emerging markets of comparable income.
- Size and concentration:
  - The three largest banks account for 55 percent of bank assets.
  - As of June 2011, 42 commercial banks had more than half the assets of the financial system.
  - Seven large financial groups anchored by a commercial bank control or manage about 73 percent of all financial assets.
  - The banking system is dominated by seven large banks, with 82 percent of bank assets; five of these are foreign-owned subsidiaries.
- Key nonbank intermediaries and public institutions:
  - 14 pension fund managers (AFORES) (managers) and 86 pension funds (SIEFORES).
  - 43 mutual fund management companies manage 549 funds.
  - Government has nine development banks and public sector funds, plus two large public mortgage entities—INFONAVIT and FOVISSTE.
- Systemic concerns:
  - Close interconnections across groups pose systemic risk, may undermine competition, and create conflicts of interest.
  - Transparency of intra-group transactions and exposures, and strong consumer protection, are essential.

### Banking system soundness and recent episodes of strain
- Key indicators (system-wide, as of June 2011 unless otherwise indicated):
  - Regulatory capital to risk-weighted assets: 16.5 percent.
  - Regulatory Tier 1 capital to risk-weighted assets: 14.3 percent.
  - Capital to assets: 9.8 percent.
  - Liquid assets to total assets: 43.3 percent (noting figure in Table 6 shows 43.3 for 2010 and 43.6 for 2011 1/).
  - Liquid assets represent more than 40 percent of total assets.
  - Commercial bank loans to sub-national governments and public enterprises, and holdings of government securities, represent about a quarter of total bank assets.
- Profitability and asset quality:
  - Profitability declined sharply in 2008–2009 but remained satisfactory as loan quality improved, provisions and write-offs fell, and credit growth picked up.
  - Nonperforming loans to total gross loans: 2.3 percent (as of June 2011 1/).
  - Return on assets: 1.6 percent (2011 1/).
  - Return on equity: 16.0 percent (2011 1/).
- Four episodes of financial system strain since the 2006 FSAP Update:
  1. Post-Lehman turmoil: high FX volatility, BoM intervention, closing of capital markets for some issuers, drying up of secondary debt market liquidity, major losses by nonfinancial corporations in OTC derivatives.
  2. Bursting of the credit card and personal loans bubble (2008–2009): lax underwriting led to steep increase in nonperforming loans and significant write-offs when unemployment increased in 2009.
  3. Distress in non-deposit-taking, unregulated housing finance institutions (Sofoles/Sofomes): led to illiquidity and insolvency.
  4. Rapid increase—from a low base—in bank lending to states and municipalities: some smaller banks had very high exposures; loans suffered major restructuring, impacting liquidity and capital.
- Regulatory responses:
  - CNBV modified provisioning methodology for credit and mortgage portfolios and for bank loans to states and municipalities—moving to an expected-loss method based on borrowers’ past repayment record and other creditworthiness indicators.

### Interest rates and margins
- Policy rate was cut by 375 basis points in response to the global crisis, contributing to lower interest rates.
- Lending rates fell more among the largest banks (competition for large corporates); consumer loan rates declined less, reflecting higher perceived risk after the credit card episode.
- Risk-adjusted financial margins declined, contributing to lower bank profitability.

### Stress testing and resilience
- Multiple stress-testing exercises conducted by CNBV, BoM, and the FSAP team covered credit, market, liquidity, and contagion risks; all three found the banking system has adequate capital to withstand severe shocks.
- FSAP top-down stress test:
  - Modeled 10 largest banks (accounting for 84 percent of the Mexican banking system) using bank profit sensitivities to macroeconomic factors.
  - Included a WEO baseline and two adverse scenarios for 2012–2013:
    - Adverse Scenario 1: slower but positive U.S. growth.
    - Adverse Scenario 2: U.S. recession.
  - Even under adverse Scenario 2 with large bank-specific shocks each quarter, banking system profitability remains sufficiently high; only three banks would post declining CAR ratios in scenario 2 when they retain all earnings.
- CNBV supervisory stress test:
  - Banks estimated balance sheet and income statement impacts under a two-year supervisory stress scenario designed jointly by IMF, CNBV, and SHCP.
  - Baseline follows June 2011 WEO; adverse scenario mimics near-recession in Europe and recession in the United States.
  - CNBV provided expected loss estimates for seven broad credit classes linking probabilities of default to macroeconomic factors; banks assumed credit growth, earnings retention, net interest margins, and other operational aspects.
  - CNBV checks results for consistency and estimates unexpected losses with its model; also assesses market risk via VaR and stressed VaR and liquidity risk via Basel III liquidity coverage ratio (LCR).
- Stress-test outcomes:
  - FSAP and CNBV stress tests indicate the Mexican banking system would remain highly solvent with CARs well above 10 percent under the tested adverse scenarios.
  - CNBV found most banks have more than adequate liquidity, though a few banks have LCRs below 100 percent.
  - Liquidity risk for the system as a whole is muted given significant monetary regulation deposits (DRM) exceeding 13 percent of customer deposits and limited reliance of foreign banks on parent or wholesale funding.
- Modeling notes and caveats:
  - Macro factors in bank profit models account for 23 percent of overall sample variation in bank profit and loss rates; bank-specific residuals parameterize idiosyncratic shocks.
  - The zero risk-weighting of banks’ holdings of government securities was not modified (and was not stress-tested).
  - Since July 2011 preparations for CNBV bank-based stress testing, the macroeconomic outlook deteriorated notably.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1265.pdf*

### 17.      BoM’s stress test assumptions and results are published in its September 2011

### _cr1265 - 17.      BoM’s stress test assumptions and results are published in its September 2011

### BoM stress test design and scenarios
- Stress scenarios included macro-market shocks with a contagion phase and a credit stress scenario.
- Contagion was measured based on the idiosyncratic failure of a single financial institution among all banks, brokerage firms, mutual funds, pension funds, and selected foreign institutions.
- Failure is defined as CAR below 8 percent.
- A more involved contagion exercise used a common shock to underlying macroeconomic variables that creates the potential for multiple institution failures.

### Contagion test results
- BoM’s estimates suggest that contagion risk represents only a minor risk, reflecting the relatively limited role of interbank markets and the likely importance of wholesale funding from intra-group institutional investors.
- Under the common-macroeconomic-shock contagion exercise, losses rose from about 8.2 percent of system capital without contagion to around 13 percent.

### Credit stress test assumptions and results
- Assumptions:
  - Bank portfolio default probabilities are tripled over 18 months.
  - Bank interest income is reduced by 80 percent from pre-stress levels.
  - Recovery rates are shocked to half of their historical averages.
- Result:
  - The exercise causes the system average CAR to fall by nearly 7 percentage points but still remain above the regulatory minimum.

### Key observations on supervisory framework and policy implications
- Financial sector assessments since the 2006 FSAP Update show good progress but identify scope for further improvements across banking, insurance, securities regulation and payment systems oversight.
- Overarching supervisory themes and recommendations:
  - The CNBV and the CNSF should have more independence and budget autonomy while increasing accountability.
    - There is neither a defined appointment period for, nor well-specified causes for dismissal of, senior management.
    - The SHCP controls 10 out of 13 CNBV Board members, indicating excessive influence over Board composition.
    - High CNBV staff turnover: between 2007 and 2010, 255 senior staff and specialized personnel left the CNBV; salaries have been frozen for the past seven years.
  - Legal protection of supervisors needs strengthening:
    - Management, Board members, and staff are not accorded statutory legal immunity for the bona fide discharge of official functions; former employees are not covered.
    - Legal protection is important in a civil code legal environment when implementing risk-based supervision.
  - CNBV must balance codified rules and supervisory discretion:
    - Codify circumstances in which discretion will be exercised to minimize challenges to authority, while retaining flexibility to deal with novel situations using qualitative judgments.
  - Concentration and conglomeration risk should be more prominently reflected in regulation and supervision:
    - Presence of financial and mixed activity groups and concentrated loan portfolios create potential conflicts of interest and hidden risks, including contagion.
    - Consolidated supervision should be strengthened by giving supervisors powers to regulate both financial and mixed-activity groups and extend prudential regulation, risk limits, and risk governance to the group level.
  - The sanctions regime should be strengthened:
    - Fines should be dissuasive and enforcement actions disclosed promptly.
    - Legal restrictions on disclosing enforcement proceedings before all rights of appeal are exhausted and on reaching settlements should be removed.
    - Note: Recently, the CNBV significantly increased fines applied to brokers for violations of investment advisory and securities sales rules, as well as AML/CFT requirements.

### Licensing, liquidity, operational risk, and Pillar 2 implementation
- Licensing weaknesses and recommendations:
  - CNBV has taken over licensing from the SHCP, but ultimate beneficial owners (UBO) are not necessarily clearly identified and parallel banks operate; BoM holds veto power over granting licenses.
  - Recommended measures:
    - Adopt additional criteria for approval of applicants and tracking their sources of funds; explicitly define UBO in law.
    - Introduce stringent operating criteria on parallel banking and mixed-activity groups and use licensing powers to mandate changes in by-laws of unregulated mixed-activity parent companies.
    - Require banks to notify the CNBV of major changes planned in business activities, structure, and adverse developments or breaches in regulations.
- Liquidity and operational risk monitoring:
  - A new liquidity risk regulation should require banks to explicitly link credit risk and liquidity risk, monitor core liquidity risk indicators and limits, use forward looking liquidity risk metrics, and report residual maturities and liquidity forecasts.
  - Operational risk monitoring is currently indirect through supervision of internal controls; implementation slated for 2012 will include a database for measuring operational risk and allow additional capital charges under Pillar 2.
- Basel II (Pillar 2) recommendations:
  - Implementing Basel II supervisory review (Pillar 2) would complement capital buffers and move to a fully risk-based regulatory system.
  - Pillar 2 would:
    - Link Boards’ responsibilities explicitly to levels of risk and capital.
    - Provide authority, methodologies, and criteria to require banks to increase capital to offset loan concentration, liquidity, interest and operational risks.
    - Relate supervisory review outcomes to banks’ ICAAP to determine future capital needs.
  - Additional supervisory strengthening measures:
    - Create a quality assurance function to increase consistency and standardize supervision practices with updated manuals.
    - Introduce a formal supervisory cycle to cover all significant areas and for resource planning.
    - Standardize internal criteria, procedures, and metrics for risk assessment and onsite inspections.

*Source: IMF staff findings as presented in the cited section.*

### 24.      Priorities in strengthening securities supervision include clarifying the derivatives

### Priorities in strengthening securities supervision include clarifying the derivatives

### Securities supervision: legal framework, enforcement powers, and reporting
- The CNBV’s responsibilities, powers, and jurisdiction with respect to derivatives are unclear owing to the lack of specific legislation in this area; this raises concerns about the potential for overlaps with other agencies and the possibility of conflict in supervisory approaches.
- Recommendation: Fill the legislative gap promptly either by development and passage of dedicated derivatives legislation or by extensive additions to the capital markets law—timely in light of the G-20’s drive to boost supervision of derivatives markets.
- Additional powers and tightened reporting standards recommended:
  - Power to be more transparent about enforcement matters.
  - Power to settle disciplinary matters without a hearing.
  - Power to order restatements of financial statements by public issuers.
  - Power to order restitution to compensate defrauded investors.
  - Power to inspect any regulated entity without giving prior notice—even when no breach of the law is suspected.
  - Power to intervene in the sales and redemption process at mutual funds in appropriate circumstances.
- Reporting improvements recommended:
  - Shorten the delivery time for public companies’ audited statements.
  - Shorten the delay for capital adequacy reporting by market intermediaries.
  - Institute a notification requirement in case capital declines below required levels.

### Further measures to improve securities supervision
- Improve coordination with other authorities to ensure that similar investor protection rules apply to similar securities and insurance products.
- Enhance CNBV transparency by:
  - Making consolidated versions of rules more easily accessible on its website.
  - Expanding disclosure regarding its activities to enhance accountability and assist the industry in understanding the CNBV’s expectations.
- Enhance market transparency by ensuring routine disclosure of full information on the risks posed by leverage to less sophisticated investors.
- Increase transparency about issuers by:
  - Ensuring shareholder meeting materials are posted online, with a longer notice period.
  - Reducing the threshold for reporting changes to insider ownership positions to no more than 2 percent from the current 5 percent.
- Complete the project to develop a comprehensive regulatory regime for conflicts of interest and conduct of business across all financial institutions regulated by the CNBV.
- Invest more in examination programs in new areas, such as the new asset management program.
- Conduct periodic reviews of the continuous disclosure documents provided by public issuers to ensure appropriate standards continue to be met.

### Insurance: legal framework, asset-liability mismatch, and IAIS recommendations
- The legal and institutional framework supports regulation and supervision of the insurance sector and is about to be overhauled once the new insurance law is approved by parliament.
- The promulgation of the new insurance law will result in improved compliance with the IAIS core principles; issuing and implementing secondary regulations will further boost compliance.
- Concern: Lack of independence and budget autonomy of the CNSF.
- Asset-liability mismatch identified:
  - Reported mismatch of 5 years and 12 years in domestic and foreign currency, respectively.
  - A mismatch of about 15 years in the indexed currency, reflecting the lack of long-term government indexed paper, is a source of vulnerability requiring close attention and monitoring.
- IAIS-based recommendations:
  - Establish an implementation plan for the adoption of the Solvency II regime targeted to the Mexican circumstances.
  - Introduce, once the new solvency regime is in place, an enhanced and more intrusive inspection system that is adequately resourced.
  - Step up requirements for maximizing the value of assets of companies under liquidation and enhance the efficiency of winding-up proceedings for insurers as proposed in the new insurance law.
  - Provide guidance on the accounting for reinsurance recoveries, and on the assets backing up catastrophic reserves that could require investments abroad.
  - Revisit the arbitration mechanism to encourage its use.

### Payment systems: framework and recommendations
- The legal and regulatory framework for payment systems is sound, complete, and underpinned by a comprehensive payment systems law, but gaps remain.
- Recommendations:
  - For the payment system SPEI, BoM should integrate its business continuity plans with that of participants to establish a comprehensive system-wide business continuity plan.
  - For the CLS, access by more Mexican financial institutions for foreign exchange settlement would decrease systemic risk and increase system efficiency.
  - BoM and the CNBV should consider establishing formal oversight arrangements on payment and settlement system at the technical level, building on existing cooperation.
  - To prepare for adopting the CPSS-IOSCO Principles for Financial Market Infrastructures, authorities should consider reviewing:
    - Coverage of central counterparties (CCPs) and other systemically important payment systems.
    - Issues related to crisis management and their link to bank resolution issues.
    - Legal protection for formalized arrangements for over-the-counter (OTC) derivatives clearing.

### Supervisory architecture: independence, overlap, and reform options
- Longstanding lack of independence and budget autonomy of supervisors could be addressed by rationalizing Mexico’s supervisory architecture.
- Suggested improvements to the present structure:
  - Reduce overlapping functions between the BoM and the CNBV in areas such as derivatives, capital and liquidity norms, and licensing.
  - Separate prudential from market-conduct roles to provide more space for capital market development.
  - Improve coordination to address industry conflict of interest issues and to keep up with an increasingly integrated financial sector.
  - Achieve better alignment between BoM and the CNBV during emergency liquidity support situations.
  - Minimize the risk of coordination and information failures between central bank and prudential authorities that would delay crisis response.
- Risks of maintaining status quo: deterioration in institutional strength and further loss of high-quality, experienced staff.
- Reform options (not necessarily mutually exclusive):
  - Integrate the prudential functions of the CNBV with BoM and keep conduct of business functions separate in a “twin peaks” model.
  - Consolidate the CNBV, CNSF, and CONSAR into an integrated financial supervision agency to keep pace with industry integration.
  - Change the administrative status of supervisory agencies from de-concentrated entities under the SHCP to decentralized agencies, increasing their budgetary autonomy and independence—paired with greater accountability.

### Liquidity management and financial safety net arrangements
- Liquidity management (BoM balance sheet):
  - The cost of monetary policy is borne entirely by the central bank; the central bank is responsible for interest payments on treasury securities issued for monetary policy purposes and on short-term liquidity absorption deposits.
  - With growing foreign reserves, financial results became increasingly dependent on the path of the exchange rate and on the differential between local and international interest rates.
  - No provisions in the central bank law regarding government coverage of central bank losses.
  - Recommendation: BoM should ensure forward-looking monitoring of its balance sheet to identify potential problems and allow proactive remedial measures.
- Measures to help monetary policy transmission and banks’ liquidity management:
  - Transferring IPAB’s debt to the Federal Government would reduce floating-rate instruments to almost a half of their current outstanding amount.
  - Improve banks’ liquidity management by:
    - Changing the time of its first short-term daily intervention closer to the opening time of the interbank market to reduce uncertainty about the amount of liquidity available for the day.
    - Settling auctions of Bondes LD in T+1, instead of T+0, to prevent auction results interfering with banks’ individual liquidity positions for the day.

### Emergency liquidity facilities and bank resolution
- Emergency liquidity facilities:
  - BoM operates a standing liquidity facility (SLF) introduced in 2008 with public access requirements and conditions, and an emergency liquidity assistance (ELA) arrangement with policies, internal procedures, and standard contracts that have not been made public due to moral hazard concerns.
  - No formal consultation with the CNBV in assessing a bank’s solvency when liquidity support is requested.
  - BoM does not consult with CEF on the potential systemic impact of rejecting an ELA request by a bank that does not comply with BoM’s internal policy requirements.
  - Recommendation: BoM should consider disclosing the broad conditions for emergency lending and consulting the CEF.
- Bank resolution framework: historical changes and current recommendations:
  - Reforms since 1995 include introduction of deposit insurance with explicit and limited coverage in 1999; an early warning system in 2004; legal changes in 2006 clarifying causes for revoking a bank’s license and adding resolution options; and transfer in 2008 of authority for granting and revoking bank licenses to the CNBV.
  - Authorities drafting a major overhaul of the bank resolution framework could consider:
    - Strengthen the PCA framework by including liquidity indicators that are not considered PCA triggers to enable earlier supervisory action.
    - Reduce time delays involved in intervening in a troubled bank.
    - Prevent delays through the appeals process (not yet tested in court).
    - Adopt implementing procedures for the use of trust funds to operationalize the purchase of assets and liabilities (P&A) bank resolution method.
    - Adopt a streamlined administrative process for liquidation of the residual balance sheet of a failed bank to reduce time and increase recovery value of assets.
    - Include the possibility of partial transfer of liabilities under a bank resolution process.
  - Crisis simulation exercise findings:
    - Review framework for injecting liquidity in systemic situations.
    - Establish an objective methodology for assessing potential systemic consequences of bank liquidation.
    - Review protocols to implement more oversight “in-situ” at first signs of problems in banks.
    - Review the “automaticity” of IPAB’s exceptional financing options, including contingency lines of credit that BoM may provide at its discretion.
    - Establish a robust mechanism (e.g., explicit SCHP’s guarantees) to effectively protect BoM’s balance sheet for such operations.
    - Develop an external communications strategy for crisis situations identifying the responsible entity for public statements.

### Deposit insurance system: coverage, resources, and recommendations
- IPAB’s legacy debt service prevents a more rapid accumulation of funds; transferring this debt to SHCP would increase the credibility of the guarantee fund.
- Currently only 25 percent of collected premiums, net of operating expenses, are accumulated in a guarantee fund, undermining IPAB’s financial capacity to protect small depositors.
- Authorities plan the transfer of IPAB’s debt to the Federal Government with a gradual reduction of the percentage of the deposit insurance premiums (currently 75 percent) earmarked to service that debt.
- Deposit insurance coverage and resources:
  - Coverage limit is about US$137,000 per person and per institution.
  - Coverage fully covers the obligations of 99.9 percent of all deposit accounts and 55 percent of total deposits.
  - The ex-ante fund contains less than 1 percent of the amount of insured deposits.
  - Minimum annual insurance premium is 0.4 percent on total liabilities (with a ceiling of 0.8 percent).
  - IPAB can issue debt up to 6 percent of the total liabilities of the system over three years; practical implementation is unclear.
- Recommendation: Authorities should carefully consider the proper timing for any reduction in coverage.

### Mexico and the international reform agenda: Basel III implementation
- Mexican authorities committed to adopting key Basel III capital requirements by 2012, and banks are ready according to CNBV simulations using June 2011 data.
- Simulation results:
  - CARs decreasing from 16.5 percent to 16.1 percent (versus 8 percent in Basel III—10.5 percent, including the conservation buffer).
  - Not all elements had been simulated at the time of the mission (for example, expected loss provisions for loans to corporates and small and medium enterprises had not been calculated).
  - Some banks—including a few large ones—appear close to the minimum requirements.
  - Recommendation: Complete the simulation of the full impact of the new rules before planned adoption.
- No plans yet to introduce Basel III macroprudential or liquidity requirements (countercyclical capital buffers, capital surcharges for large banks, bail-in or contingent capital schemes, internal models for counterparty credit risk).
- Consideration being given to allow recognition of subordinated debt as tier 1 capital if it meets criteria for loss absorption (through convertibility) and if the bank floats at least 15 percent of capital on the stock exchange.
- Authorities plan to adopt Basel III liquidity requirements according to the agreed international timeframe because some smaller banks might have difficulty complying with the net stable funding ratio.
- Recommendation: Authorities may wish to create incentives to accelerate adoption of the new rules and conduct stress tests on banks’ liquidity to detect potential vulnerabilities.

*IMF staff report excerpt.*

### 43.      The application of G-SIFI surcharges and other elements of Basel III may pose

### 43.      The application of G-SIFI surcharges and other elements of Basel III may pose additional challenges for Mexico.

### A. Basel III and G-SIFI impacts on Mexican markets
- Basel III’s higher risk weights for counterparty credit risk in trading books could lead to a reduction of liquidity in the debt and OTC derivative markets of emerging market economies, as banks will have less incentive to act as market makers.
- Calibration of sovereign risk charges is an additional challenge:
  - Banks can choose to apply a zero capital charge to domestic currency sovereign debt, or apply their own internal models and treat foreign subsidiaries’ holdings of domestic debt as foreign debt.
  - Parent bank risk models and home-country regulations may influence portfolio allocation decisions of their Mexican subsidiaries, impacting local government securities markets.
- Capital surcharges applied by home country supervisors on for G-SIFI parent banks will affect capital allocation in the group, including subsidiaries.
- Footnote: FSB and BCBS identified 29 G-SIFI’s on November 4, 2011. Of the three largest Mexican banks, two were included (Citigroup and Santander); BBVA was not included.

### B. Macroprudential policy framework and instruments
- Recommendation: Build on the recently created Financial Sector Stability Council (FSSC) to strengthen the macroprudential framework.
- Role of FSSC: strengthens coordination among agencies, analyzes emerging risks regularly, and puts forward recommendations (for example, on how to address the growing risk of credit to states and municipalities).
- FSSC working groups focus on:
  - identification and measurement of systemic risk and the tools to offset this;
  - data collection and availability of information to financial markets;
  - financial system vulnerabilities; and
  - bankruptcies.
- Measures that could be considered:
  - (i) introduce a “comply or explain” approach to FSSC recommendations;
  - (ii) improve mechanisms for sharing the analysis needed to assess risks;
  - (iii) sharpen the differentiation between BoM and FSSC reports, with the latter focusing less on macroeconomic risks and more on identification of emerging financial system risks enhancing “market intelligence”;
  - (iv) monitor systemically the regulatory perimeter (both domestically and abroad);
  - (v) communicate emerging risks to the public and industry, including by publishing recommendations and decisions; and
  - (vi) analyze the effectiveness of a wide range of macroprudential instruments to counter systemic risk (including caps on loan-to-value, debt-to-income, credit growth; limits on maturity mismatches, time-varying or dynamic provisioning, and restrictions on profit distributions).

### C. Cross-border coordination and resolution
- Internationally agreed principles should guide potential conflicts of interest between home and Mexican supervisors regarding locally systemically important subsidiaries of G-SIFIs.
- Issues noted:
  - Regulators prioritize domestic financial stability and depositor protection and may not account for foreign jurisdictions’ perspectives.
  - Foreign subsidiaries are incorporated under local laws and are seen as stand-alone entities by authorities, even if supervised on a consolidated basis by a home supervisor.
  - In extreme stress, conflicts could arise between host- and home-country authorities and between local and foreign management.
  - Lack of supranational laws and courts, and absence of effective cross-border resolution frameworks (including ex-ante agreed loss-absorption mechanisms), could amplify tensions in a global bank resolution.
- Recommended basis for resolution: cooperation and information sharing between host and home supervisors.
  - Coordination in the form of Memoranda of Understanding (MoU) and functioning supervisory and crisis management colleges are essential to balance host and home interests.
  - Assessors found current cooperation arrangements with relevant foreign supervisors to be excellent.
  - Concerns: access to supervisory colleges is not automatic; there is no agreed definition of systemic banks in host jurisdictions.
  - Recommendations: ensure access to recovery and resolution plans (“living wills”) for all stakeholders of a G-SIFI; carry out cross-border crisis simulation exercises; and foster reciprocal knowledge of legal and regulatory frameworks of parent and subsidiaries.

### D. OTC derivatives
- Derivatives play an important role in Mexico’s financial system; authorities should closely monitor international OTC derivatives reform and pursue agreements to establish robust CCP practices.
- Concerns around the G-20 2009 decision to clear standardized derivatives through central counterparties by end-2012:
  - Uneven implementation of international reform and discrimination among jurisdictions.
  - Cross-border legal aspects could concentrate operations in a few markets, forcing participants to operate in CCPs directly regulated and approved by foreign authorities.
- Recommendation: carefully assess the scope of mutual recognition regimes for trade repositories and clearing houses to achieve fair reciprocal treatment.

### VI. Developmental issues — key findings and recommendations (paragraphs 48–55)
- Public debt management:
  - Significant progress made; maturities have lengthened; domestic/foreign and fixed/variable composition improved; investor base more diversified.
  - Syndicated collocations of long-term fixed-rate and inflation-linked bonds are accelerating market benchmarks and allow inclusion in the World Government Bond Index (WGBI).
  - Further improvements possible in information gathering and disclosure: provide more information on ownership categories and classify based on risk positions (important for repos).
  - The market for fixed-rate bonds could be deepened by adjusting maturity dates.
  - The persistent spread of around 40 basis points between the TPFB and the 28-day TIIE should be reduced by standardizing the treatment of IPAB premiums.
- Capital markets and corporate financing:
  - Corporate debt and equity markets have few issuers; institutional investors hold most assets in fixed-income securities, mostly government bonds.
  - Financial savings are not being channeled into long-term productive investments.
  - Recommendations for a comprehensive medium-term strategy:
    - (i) reform the mutual fund industry to foster competition;
    - (ii) increase controls on related-party transactions;
    - (iii) create a hybrid regime within the public offering framework to increase supply of securities and allow institutional investors to invest in specialized instruments;
    - (iv) set up a comprehensive program to encourage new issuers, including bringing large economic sectors, such as energy and banking, to the public equity market;
    - (v) introduce a legal framework for derivatives; and
    - (vi) increase regional stock market integration.
  - Footnote: Banks will be required to float shares in the BMV to have their subordinated debt included as part of Tier 2 capital.
- Pensions and annuities:
  - Pension contribution rates for private employees should be set to achieve reasonable replacement rates at retirement.
  - Regulatory approach should focus on long-term investment performance to avoid wasteful short-term competition between funds.
  - Use of derivative instruments for leverage rather than hedging should be carefully monitored.
  - The private annuity system is overregulated, restricting effective competition due to pricing and technical parameter restrictions; improvements could come from better selection of the reference interest rate and changes in investment regulation and contract policies.
- Housing finance:
  - The private-sector housing finance funding and origination model was severely hit by the global crisis; many nonbank housing lenders and developers exited the market.
  - Housing finance is now dominated by government agencies (84 percent of mortgage originations) and commercial banks.
  - Lack of long-term funding constrains balanced mortgage lending growth; securitization is no longer an option for private lending due to investor reluctance.
  - Policy priority: level playing field between agencies and private sector, revive private securitization by restoring investor confidence and economic price formation, and develop a comprehensive strategy to support lending to the unaffiliated population.
- Financial inclusion and regulation:
  - Financial inclusion has increased significantly, but large population segments still lack access.
  - Authorities issued enabling regulations for new business models; most schemes are nascent and their commercial viability is uncertain.
  - Recommendation: BoM should review policies on retail commissions; allowing free price setting for some services could increase service provision.
- Cooperatives and supervision:
  - Many cooperatives to be transferred to CNBV supervision do not meet regulatory prerequisites and would need to be closed.
  - No procedure currently exists to handle closures; a process is needed to protect or migrate customer accounts.
- Credit reporting:
  - Progress: two bureaus expanded coverage.
  - Market remains incomplete and fragmented, affecting competition in both credit information and credit markets.
  - Recommendations: improve standardization of information; integrate players and products; strengthen oversight of credit reporting; review governance structures of credit bureaus to eliminate conflicts of interest and ensure better information sharing.
  - Scope of data could be expanded to include government programs, court judgments, fraud alerts, and property registries.
- Legal and institutional constraints:
  - Weak property rights, complex and unreliable insolvency and creditors’ rights framework, inefficient and corrupt judicial system, and insufficient transparency in financial information continue to hamper financial development.
  - These factors increase bank risks, raise loss-given default, increase bank spreads, and restrict access—especially for small and medium enterprises.

### Annex I — Basel Core Principles (BCP) — summary assessment: introduction and context
- Assessment details:
  - An assessment of the Basel Core Principles for Effective Banking Supervision (BCP) was conducted as part of the FSAP in September 2011 by Joaquín Gutiérrez García (IMF) and Pierre-Laurent Chatain (World Bank).
  - The assessment reflects banking supervision practices of Mexico as of end-July 2011 and followed the Core Principles Methodology issued by the Basel Committee in October 2006, assessing compliance against essential and additional criteria.
- Macroeconomic background and policy response:
  - After a steep fall in output in 2009, Mexico experienced a broad-based recovery with a resurgence of manufacturing exports and renewed consumption.
  - Authorities used countercyclical policies: the central bank loosened monetary policy while the government applied a fiscal stimulus of 3 percent of GDP.
  - Other measures included foreign-exchange interventions (first since September 1998), an FX swap agreement with the U.S. Federal Reserve, an FCL from the IMF to backstop net international reserves, and an additional liquidity facility allowing a broader range of eligible collateral for emergency liquidity support.
  - Exchange rate appreciated by about 10 percent during the surge in capital flows to emerging markets.
  - Performance indicators: low inflation—below 4 percent per annum; net public sector debt stands at around 32 percent of GDP in 2011; household borrowing is about 20 percent of disposable income.
  - Mexico is investment grade.
- Macro- and micro-prudential measures taken:
  - Related-party lending for banks was tightened to 25 percent of Tier 1 capital.
  - Forward-looking loan-loss provisioning was introduced on consumer, mortgage, and states and municipalities portfolios (pending for credit to non-financial firms).
  - Tightening of corporate disclosure on derivative positions following large corporate losses.
  - Regulatory perimeter expanded to cover mortgage providers that faced liquidity problems and losses.
- Structural and growth challenges:
  - Between 1985 and 2008, annual average growth in per capita GDP amounted to 1.1 percent.
  - Low growth attributed to poorly functioning credit markets, high informality, and significant market distortions related to lack of competition.
  - Mexico scores high on corruption indices, mainly due to subnational problems; legal system not efficient.
  - Financial depth: credit to GDP well below peer emerging markets, at about 20 percent of GDP at end-2010.
  - Dependence on oil exports has declined, though oil revenue share in the budget has not fallen as rapidly due to higher international oil prices.
- Main risk factors:
  - Slowdown in U.S. industrial production could weaken domestic activity and loan portfolio quality.
  - Adverse developments in the oil market could lead to contraction in public expenditures, despite active hedging of oil exports.
  - Continued extension of maturity and duration of domestic government debt recommended to reduce sensitivity to liquidity shocks amid elevated global volatility.
  - Mexico may be affected by global risk aversion and spillovers from the European crisis, given large presence of Spanish banks operating as stand-alone subsidiaries in the financial system.
- Institutional and market structure overview:
  - CNBV is responsible for licensing and supervision of banks and is also the securities regulator.
  - Overlapping mandates observed with other authorities such as BoM, which has roles in bank licensing, capital and liquidity prudential regulation, and derivatives.
  - SHCP authorizes financial groups and has a dominant presence on governing Boards of other agencies, except BoM (independent).
  - CNBV supervisory practices:
    - Uses a mix of on-site and off-site supervision; off-site and on-site duties split between two vice presidencies.
    - Since the 2006 FSAP, CNBV carried out 143 on-site examinations in 43 banks.
    - In 2008–2010, CNBV carried out 87 on-site examinations.
    - CNBV has coherent planning and execution processes and issues manuals for thorough, consistent supervision; makes active use of prudential returns and has channels of communication with all levels of bank management.
  - Market structure:
    - Mexico’s financial system is small and concentrated, with seven banks accounting for more than 80 percent of the system’s assets.
    - At end-September 2011, there were 41 banks (bancos multiples), commonly divided into:
      - (i) 7 large banks, of which 5 are subsidiaries of foreign banks;
      - (ii) 10 banks focused on consumer lending;
      - (iii) 13 corporate banks; and
      - (iv) 11 other investment banks.

*Source: IMF staff report content provided in the supplied document excerpt.*

### 9.      There are 25 financial groups in which a holding manages several financial entities,

### 9.      There are 25 financial groups in which a holding manages several financial entities,

### Financial groups, conglomeration, and regulatory scope
- There are 25 financial groups in which a holding manages several financial entities, usually including one bank.
- The largest groups are involved in banking, insurance, asset and fund management, brokerage, and pension fund administration.
- Risks noted:
  - Conglomeration issues may lead to product bundling with nontransparent cross-subsidies, deterring entry and competition.
  - Several banks are members of broader mixed-activity groups that conglomerate banking with commercial activities, creating association risks that "still need to be regulated and supervised to mitigate association risks."
- Regulatory note:
  - "There are regulations to prevent cross-subsidies."

### Banking system condition and key statistics
- System-wide capital and profitability:
  - System-wide risk-weighted capital asset ratio: 16.5 percent as of June 2011.
  - Tier I capital: 14.3 percent as of June 2011.
- Profitability and credit:
  - Profitability declined sharply in 2008–2009, but has recovered more recently with improvement in loan quality, pickup in credit growth, and rapid declines in provisions and write-offs.
  - Bank credit to the private sector has been pro-cyclical.
- Liquidity and asset composition:
  - Liquidity seems adequate.
  - The loan-to-deposit ratio is moderate.
  - Banks keep about one-third of their total assets invested in government securities.

### Legal and institutional weaknesses affecting financial development
- Persisting weaknesses:
  - Relatively weak property rights.
  - Complex and unreliable insolvency and creditors’ rights framework.
  - Inefficient and corrupt judicial system.
  - Insufficient transparency in financial information.
- Consequences:
  - These factors increase bank risks, raise loss-given default, increase bank spreads, and restrict access to finance, especially for small and medium enterprises.
- Reforms and improvements:
  - Mexico has passed key reforms, including a Unified Registry for Movable Collateral, and reforms of the Law on Bankruptcy and the Commercial Code.
  - Improvements in credit bureaus and risk modeling have allowed better credit risk assessment by banks, vendors, and other suppliers.
  - Costs of realizing collateral remain high and long.

### CNBV: supervisory progress, strengths, and institutional constraints
- Achievements:
  - Banking supervision has been effective and contributed to reducing the impact of the global financial crisis.
  - CNBV implemented a complete Pillar I capital adequacy regime consistent with Basel Committee standards.
  - Capital ratios have been kept robust above regulatory minimums, supported by a rigorously applied forward-looking loan provisioning regime.
  - CNBV has developed robust means to quantify and monitor key risk measures.
  - Since 2006, CNBV has advanced a profound internal reorganization toward a more risk-focused supervisory culture, visualizing supervision on institutional, group and by-risk dimensions, and is setting up systemic supervision.
  - Professionalism and quality of management and supervisory staff are described as outstanding; rich off-site systems for supervision are in place.
- Constraints and threats to sustainability:
  - Autonomy and resources of CNBV remain limited; CNBV is still an agent of the Executive and most key decisions belong to its Board.
  - Lack of autonomy in funding and in providing competitive salaries is eroding supervision through high staff turnover.
  - Management cannot flexibly restructure head-count despite apparent excess; proliferation of small institutions and increasing compliance requirements overload CNBV.
  - Legal protection for supervisors is insufficient: management, Board members, staff, and former employees are not accorded statutory legal immunity for bona fide discharge of official functions, hindering enforcement.
  - Balance needed between codified rules to limit legal challenges and flexibility for prompt qualitative judgments in novel situations; amendments to the legal framework will be needed.

### Pillar 2, consolidated supervision, and other supervisory gaps
- Pillar 2 implementation:
  - "Pillar 2 of the capital adequacy regime remains to be adopted, including publication of CNBV’s supervisory review process and associated standards."
  - CNBV has focused on quantification of Pillar 1 risks and advanced several internal elements of Pillar 2, but several practices and standards deserve attention to complete Pillar 2.
- Consolidated supervision recommendations:
  - Further actions recommended to strengthen a robust regime for ‘downward’ consolidated supervision of banking groups.
  - Asymmetries in regulations across the financial sector have been evaluated and need mitigation.
  - CNBV should be given powers to regulate all financial groups where banks are significant members.
  - Prudential regulation, risk limits, and risk governance/management standards should be extended to the holding company level in regulated groups.
  - Mixed-activity groups performing banking alongside other financial and commercial activities must be regulated, giving CNBV effective powers to assess and resolve inter-group transaction risks.
  - These actions will complete current consolidated supervision practices and reinforce CNBV’s authority to practice ‘upward group’ consolidated supervision.
- Other supervisory areas needing improvement:
  - AML supervision has been substantially strengthened, but challenges remain and key decisions are required to reach higher compliance with international standards.
  - Enforcement should focus on substantive issues rather than solely on breaches of compliance.
  - Operational risk is well regulated but its supervision is not yet fully operational and needs systematic performance at both macro and solo levels, including systematic development of risk indicators.
  - Industry guidance is needed on how CNBV expects implementation in practice of mandated prudential standards and on the supervisory process and escalation in response to changing risk profiles.

### Main findings under the BCP assessment (selected points)
- Objectives, Autonomy, Powers and Resources (CP1)
  - Legal framework provides objectives and powers for CNBV and authority to cooperate with foreign supervisors; information exchange agreements signed with a number of countries.
  - Concerns: inadequate legal protection for CNBV and staff; Board may not fully understand complexities and resources needed for a full Basel II risk-based approach.
- Licensing and structure (CPs 2–5)
  - The term 'bank' is defined and permissible activities are stated; however, several non-authorized financial entities illegally collect deposits.
  - CNBV published a list of 14 entities collecting deposits without authorization; another 39 had been identified earlier.
  - Minimum requirements for establishing a financial institution are in the Banking Law (LIC); the licensing regime requires a favorable opinion of BoM which may hinder CNBV discretion.
  - Fit-and-proper processes exist, but additional criteria on origin of capital and a clear definition of Ultimate Beneficiary Owner (UBO) are desirable.
  - No obligation was found requiring banks to notify the supervisor promptly of material information affecting suitability of a major shareholder.
  - CNBV can review major acquisitions or investments by a bank, including cross-border operations, to confirm corporate affiliations do not expose banks to undue risks.
- Prudential Regulations and Requirements (CP 6–18)
  - Capital adequacy regime transitioning toward full Basel II implementation; CNBV considering some Basel III components and full Pillar 2 implementation.
  - Authorities advised to implement fully Pillar 2, use stress testing to set capital buffers, and encourage institutions to operate an internal capital adequacy assessment process (ICAAP).
  - Risk management: need for explicit standards for directors to implement ICAAP and a law change to require consistent risk management at group level.
  - Credit risks (CP8): framework for granting/administering credit, loan classification and provisioning is sound and complete; further actions suggested to enhance implementation.
  - Limits on large exposures and connected lending exist and are adequate, but could be reinforced by amending the LIC to require observance of lending limits on a fully consolidated basis and extending requirements to unregulated mixed-activity holdings.
  - Country and transfer risks have not been explicitly conceptualized in general provisions; CNBV regulation lacks specific requirements on capturing and reporting these risks.
  - Market risk supervision is properly carried out through annual onsite reviews and examination of risk management/internal audit reports.
  - Liquidity: major overhaul of liquidity standards is underway to implement BCBS Basel III proposals; CNBV organized a quantitative impact study; new liquidity regulations expected to be adopted during the last quarter of 2011 (subject to phase-in).
  - Operational risks (CP 15): clear regulatory regime exists but supervision is transitional; objective is to fully integrate operational risk oversight into supervisory process by 2012.
  - Internal control and audit: LIC provides comprehensive framework; CNBV formalized oversight processes but suggested improvements include full-cycle inspections on internal controls and development of metrics to monitor audit intensity.
  - AML/CFT supervision: legal/regulatory framework for banks is adequate; CNBV has full inspection powers and good national/international cooperation; need to increase human resources in AML area and enforce regulations more effectively using broader sanctions systematically.
- Methods of Ongoing Supervision (CPs 19–21)
  - Quality of ongoing supervision is good; need to improve consolidated supervision and design a supervisory cycle where all significant activities and central control functions are inspected in full scope.
  - Legal provision needed requiring banks to notify CNBV of major planned changes, structural changes, adverse developments, and regulatory breaches.
  - CNBV lacks a mechanism to evaluate risk accumulation at system level; full implementation of Basel II would help gain a more horizontal view of risks.
  - On-site/off-site architecture has changed since 2006 with new tools and a dedicated Vice Presidency for AML/CFT; several projects and manuals are still in transition or testing.
  - CNBV receives a comprehensive set of information and has a sophisticated system for collecting, reviewing and analyzing prudential reports and statistical returns.
- Accounting and Disclosure (CP 22)
  - Banks must maintain adequate records in accordance with accounting policies; Mexico should strengthen enforcement when external auditors lack expertise or independence and consider stronger auditor rotation rules and timely convergence with IFRS.
- Corrective and Remedial Powers (CP 23)
  - Corrective tools are consonant with international best practices but implementation can be weak; CNBV has a tradition of forbearance and has been reluctant to use harsh penalties.
  - Recommended reforms: enforce decisions more effectively, define clear criteria to support sanctions, and improve publication of sanctions.
  - Financial sector safety net has been substantially upgraded since the last FSAP; legal reforms are being prepared, including streamlined bank resolution process and clarification of causes for license revocation.

*Source: _cr1265 - 9.*

### introduction of a distinction between systemic and nonsystemic banks.

### introduction of a distinction between systemic and nonsystemic banks.

### Consolidated and Cross-Border Banking (CPs 24–25)
- In the area of consolidated supervision, improvements are needed to fully meet international standards.
- Authorities may wish to amend the law provide full powers to the CNBV for regulating financial groups, in addition to its current supervisory function.
- CNBV should be equipped with the power to fully capture other forms of financial conglomeration, such as mixed-activity and horizontal groups.
- On the international cooperation front, Mexico has made considerable efforts to establish effective mechanisms for cross-Border supervision.
- An intensive policy has been pursued to consolidate home-host supervision through the signing of multiple MOUs and the participation in supervisor colleges, among others.

### Annex Table 10. Summary of Compliance with the Basel Core Principles
- CP 1: There are no explicit tenors for the appointment of the President and Vice-Presidents of the CNBV. CNBV senior staff, such as Directors, can be removed at the discretion of the President of the CNBV
  - There is no appropriate provision in the law to provide adequate legal protection to the CNBV and its staff, including after termination of the period of service in the CNBV for actions taken and/or omissions made in good faith while still in active service
- CP 2: CNBV has the legal powers to regulate, supervise and enforce permissible activities.
  - Several initiatives have been taken to address the issue of unlicensed entities that are still collecting funds from the public.
- CP 3: The fact that a license requires binding favorable opinion of BoM hinders CNBV discretionary power. The mechanisms for fit and proper test are well processed within the CNBV; however, fit and proper mechanisms could be strengthened. A clear definition of the Ultimate Beneficial Ownership is also missing.
- CP 4: CNBV does not enjoy full autonomy to approve transfer of significant ownership.
- CP 5: CNBV has the power to review major acquisitions or investments by a bank,
- CP 6: Authorities have advanced the regulatory and supervisory framework to conform to the requirements of the capital adequacy regime under the Basel II capital regime. Also, explicit and implicit mechanisms have been put in place to entice institutions to operate with higher capital than the Basel minimum requirements.
- CP 7: There are not explicit regulatory requirements including guidance for banks to operate an internal capital adequacy assessment process (ICAAP) by which the Board determines its overall capital adequacy assessment and strategy. Current regulations and risk management standards are only applicable to the banking level group.
- CP 10: There are no explicit obligations requiring observance of lending limits on a full consolidated basis at holding company level and extend requirements to unregulated mixed-activity holdings. Mexico does not have an explicit definition of large exposure, including a maximum aggregated lending limit for those exposures.
- CP 11: There are no comparable standards for regulated holding companies similar to those required to banks acting as parents in a banking group.
- CP 12: There is no dedicated prudential report to obtain information of country and transfer risks.
- CP 14: Efforts are underway to revamp the liquidity regulations, which will be adopted during the last quarter of 2011.
- CP 15: Supervision of operational risks has not been completely addressed. It is not yet operational.
- CP 16: Efforts are underway to monitor interest rate risk management in selected large banking groups, including assessing the impact of alternative market scenarios through alternative financial simulation.
- CP 18: Many challenges are still ahead and key decisions will have to be made to bring Mexico to a higher level of compliance in terms of preventing abuse of financial services.
- CP 19: The quality of on-going supervision is good and CNBV has made great efforts to increase the effectiveness of its oversight apparatus. However, the supervisory approach needs to be further improved, particularly in relation to consolidated supervision.
- CP 23: The corrective arsenal in Mexico is consonant with international best practices but its implementation is not as effective as it should be.
- CP 24: The CNBV does not have full powers for regulating financial groups

### Annex Table 11. Recommended Action Plan to Improve Compliance of the Basel Core Principles
- Reference Principle: 1. Objectives, Independence, Powers, Transparency and Cooperation
  - 1.1. Responsibilities and Objectives
    - Carve in the LIC the fiduciary responsibilities of directors.
    - Mandate in the LIC the performance of the ICAAP.
    - Transfer from LIC to CNBV all regulations on risk limits.
  - 1.2. Independence and accountability
    - Provide terms of tenure and removal for senior management.
    - Review and transfer powers retained by the CNBV’s Board.
    - Estimate current/anticipated work-load to adjust head-count.
    - Align budget/salaries to current needs to stop staff attrition.
  - 1.3. Legal Framework
  - 1.4. Legal Powers
  - 1.5. Legal Protection
    - Institute an effective regime for legal protection regime.
  - 1.6. Coordination
- Reference Principle: 2. Permissible Activities
- Reference Principle: 3. Licensing Criteria
  - Provide more autonomy to CNBV for decision making.
  - Complement the Fit and Proper mechanisms.
  - Define more clearly the concept of UBO.
- Reference Principle: 4. Transfer of Significant Ownership
  - Complement the Fit and Proper mechanisms.
- Reference Principle: 5. Major Acquisitions
- Reference Principle: 6. Capital Adequacy
- Reference Principle: 7. Risk management process
  - Formalize in the LIC the responsibilities of directors.
  - Mandate ICAAP to support the implementation of Pillar 2.
  - Make public more detailed risk management guidelines.
  - Require risk management at holding company level.
- Reference Principle: 8. Credit risk
- Reference Principle: 9. Problem assets, provisioning and reserves
  - Factor in an anti-cyclical component for loan provisioning.
- Reference Principle: 10. Large exposure limits
  - Include ‘economic interdependence’ to connect borrowers.
  - Review and monitor exclusions from risk aggregation.
  - Adopt an aggregated risk limit for all large exposures.
  - Factor “concentration risk” in capital through Pillar 2.
- Reference Principle: 11. Exposure to Related Parties
  - Amend LIC to reduce the 50% aggregated lending limit
  - Include all related party transactions as per IAS 14.2.
- Reference Principle: 12. Country and transfer risk
  - Update reporting system for end-borrower/end-counterparty.
- Reference Principle: 13. Market risks
- Reference Principle: 14. Liquidity risk
  - Adopt the newly drafted regulations on liquidity risk.
  - Require reporting of residual gaps and forecasted funds flows.
- Reference Principle: 15. Operational risks
  - Achieve full implementation of operational risks supervision.
  - Increase on-site visits targeting operational risks for all banks.
  - Incorporate operational risk within the CNBV architecture.
- Reference Principle: 16. Interest rate risk in the banking book
  - Require reporting of roll-over gaps and sensitivity tests.
  - Bring formally this risk into Pillar 2 (when adopted).
- Reference Principle: 17. Internal control and audit
  - Provide clearer criteria for risk classification.
  - Adopt benchmarks to evaluate the intensity of internal audit.
- Reference Principle: 18. Abuse of financial services
  - Increase human resources in the AML area.
  - Enforce AML using a broader range of sanctions.
  - Pay more attention to terrorist financing in the industry.
  - Issue industry-specific guidelines on AML.
- Reference Principle: 19. Supervisory Approach
  - Complete Pillar 2, its supervisory review process and risks.
  - Adopt a supervisory cycle and a quality assurance process.
  - Reinforce the rating process: criteria, metrics and outcomes.
  - Pursue outcomes in terms of risk reduction strategies.
- Reference Principle: 20. Supervisory Techniques
  - Develop a transversal approach of risks on a macro level.
  - Reinforce off-site techniques for consolidated supervision.
  - Adopt workload costing and paperwork administration systems.
  - Promote a better internal Quality Control system.
- Reference Principle: 21. Supervisory Reporting
- Reference Principle: 22. Accounting and disclosure
  - Strengthen enforcement mechanisms over audit companies.
  - Set stronger rules for rotation of auditors.
  - Meet more frequently with external auditors.
  - Harmonize of accounting norms to converge toward IFRS.
- Reference Principle: 23. Corrective and remedial powers
  - Enforce decisions more effectively.
  - Define clear and well articulated criteria to support sanctions.
  - Improve the way sanctions are published.
  - Make more effective the processing of sanctions.
- Reference Principle: 24. Consolidated supervision
  - Amend LAF to transfer to CNBV group regulatory powers.
  - Regulate mixed-activity and horizontal groups and their HCOs.
  - Require prudential regulations to regulated and mixed HCOs.
- Reference Principle: 25. Home-host relationships

### Authorities’ Response (selected points)
- 21: Mexican financial authorities agreed, in general, with the conclusions, observations and recommendations of the assessment regarding the implementation of Basel Core Principles in the Mexican financial sector.
  - Financial authorities do not consider that their respective mandates overlap under an appropriate understanding of the Mexican legal system that clearly defines the respective powers granted to such authorities, and the close coordination maintained in practice by such authorities.
  - Most of the written comments provided by the authorities on the preliminary draft were included in the final report.
  - Authorities consider that the exercise represented a good opportunity to discuss both strengths and weaknesses on the banking system, as well as to draw attention to main issues that should be addressed in the future.
- 22: The authorities found the assessment both comprehensive and useful.
  - They believe that assessors’ advice and proposals will become part of their agenda for the upcoming years, and that the assessment rightly identifies opportunities for improvement.
  - Regarding the comments on CNBV independence, authorities acknowledge that improvements to corporate governance, in particular achieving a more balanced Board composition are desirable, but would like to note that the current arrangement has so far worked adequately since the Ministry of Finance has relied on technical considerations when deciding on matters of regulation and supervision.
  - They want to mention that there is not enough evidence to affirm that the current salary levels at CNBV are inadequate to attract high-caliber staff; what is a cause for concern is that they have been frozen in the last several years. If this trend is not reversed soon, the human capital of the institution will be severely impaired.
  - Authorities are concerned that there is a risk that when implementing legal changes to grant CNBV more autonomy, an adverse outcome can occur that results in the institution being subject to political interference by Congress. However, authorities agree that providing a fixed term for the President of CNBV (with well-specified reasons for removal), and to allow CNBV to keep the fees collected is desirable.
- 23: They agree that it is necessary to review, improve, standardize, fully document and formalize supervisory procedures at the CNBV and will move forward to address these issues, although they consider that lack of standardization and formalization does not reflect in any way the quality of ongoing supervision of banks.
  - Authorities agree that high concentration of loan portfolios might raise concerns, although they consider that this should not be seen as a problem unique to the banking institutions and credit markets, but that should be considered as a reflection of a feature of the Mexican economy as a whole.
  - Authorities share the assessors’ point of view regarding that some enhancements should be made to CNBV’s powers in some matters like the ability to take some discretionary decisions, to impose fines and to publish information on legal proceedings, but it should be noted that some of these powers might not be easily included in CNBV’s regulation due to the characteristics of the Mexican legal framework, considering the civil code and the law of judicial appeals and injunctions (amparos).
  - They acknowledge that there are several opportunities to enhance consolidated supervision in Mexico, but will stress that to do so it is necessary to issue a Law to regulate and supervise financial conglomerates as well as economic conglomerates that contain a banking institution.
- 24: Regarding the adoption of Basel III in Mexico, they agree that one main challenge faced by CNBV is the full and thorough implementation of Pillar II.
  - Significant progress has been made on current regulation on Pillar I –Mexico will be one of the early adopters-- and that important steps have been taken to complete implementation of all three pillars, although there are still several issues to address that are already part of the authorities’ agenda for the upcoming year.
- 25: With respect to the possible overlap between different authorities, while the law sets forth similar goals for the BoM and the CNBV (inter alia, to maintain and promote the sound development of the financial system) it grants each of such authorities different and distinctive powers to achieve such objectives.
  - CNBV is in charge of issuing prudential regulations and the BoM is responsible for defining the characteristics of transactions that banks can carry out.
  - In respect of derivatives negotiated by banks, the BoM has the legal power to issue technical and operational regulations applicable to such transactions.
  - Coordination agreements ensure that any actions taken in connection therewith by one authority supplements the work carried out by the other.
  - Authorities do not consider that the favorable opinion from the central bank that is needed to grant a bank license could impinge on the process carried out by the CNBV. The analysis carried out by the BoM for the opinion it needs to provide to the CNBV reinforces the analysis that the CNBV conducts.
  - The role that the central bank may perform as lender of last resort lays down an appropriate basis for the intervention of the BoM in the bank licensing process.

### ANNEX II. IOSCO CORE PRINCIPLES—SUMMARY ASSESSMENT (selected points)
- A. Introduction and Methodology
  - 1: The assessment was conducted during the IMF/World Bank Financial Sector Assessment Program (FSAP) mission to Mexico during the period September 7–21, 2011, by Tanis MacLaren, an external technical expert employed for this purpose by the IMF.
  - The assessment was carried out using the 2003 IOSCO Methodology for Assessing Implementation of the IOSCO Principles (the Assessment Methodology). The assessment was based on information available as of September 2011.
- B. Institutional and Market Structure—Overview
  - 2: The Comisión Nacional Bancaria y de Valores (CNBV or the Commission) is a supervisory authority with broad authority to regulate certain aspects of the capital markets in operation in Mexico.
    - The CNBV has regulatory authority over a broad range of securities market participants, including securities firms, self-regulatory organizations, securities exchanges, market infrastructure providers (central counterparties and securities depositories), external auditors, public issuers, rating agencies, price vendors, and collective investment schemes.
    - The CNBV also is responsible for the supervision of banks, development banks and agencies, cooperatives, credit unions and other deposit-taking institutions.
    - The CNBV reports to the SHCP.
  - 3: The Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros (CONDUSEF) is the consumer protection agency in the jurisdiction.
    - CONDUSEF lacks the resources and powers to function effectively as a consumer protection authority.
    - It has no power to order a financial services provider to compensate an investor for losses or to arbitrate a dispute.
    - The weakness of this agency is of concern as gaps in the consumer protection regime may negatively affect investors and undermine confidence in the system as a whole.
  - 4: The regulator’s responsibilities, powers, and authority with respect to the securities market are established by statute.
    - The CNBV was created as a regulator under the Ley de la Comisión Nacional Bancaria y de Valores (LCNBV).
    - The LCNBV gives the Commission the authority to administer, enforce, and give effect to the provisions of the laws related to financial services in the jurisdiction.
    - In the securities markets, the two key laws are the Ley del Mercado de Valores (Securities Market Law–LMV), which was effective as of the end of 2005, and Ley de Sociedades de Inversion (Investment Companies Law–LSI), which dates from 2001.
    - These laws are supplemented with detailed secondary legislation in specific areas, including the Securities Firms Rules, Issuers Rules and Sociedade de Inversion (SI) Rules.
  - 5: The Commission’s responsibilities, powers, and authority with respect to the derivatives market rely on a combination of the general authority granted to SHCP, the central bank and the Commission to regulate financial markets and their participants in Mexico.
    - These provisions do not refer to derivatives specifically.
    - The responsibilities and authority for regulation is split in practice among the CNBV, the SHCP, and BoM. All three entities have the authority to issue secondary legislation/rules for this market, which creates opportunities for duplication, overlap, and conflict in the provisions that govern.
  - 6: There is one stock exchange (Bolsa Mexicana de Valores—BMV) and one derivatives exchange (MexDer) operating in Mexico under permissions granted by the Federal Government.
    - Public offerings of securities in the jurisdiction must be listed on the BMV.
    - Trading in equities or listed derivatives is required to take place on the exchanges.
    - Trading in some fixed-income instruments and most derivatives takes place over the counter, often through electronic facilities operated by authorized inter-dealer brokers.
    - The BMV, MexDer, the central securities depository (INDEVAL), and the central counterparties (CCV and Asigna) are all part of the BMV Group, a public company self-listed on the BMV.
    - The BMV is a member of the World Federation of Exchanges.

*Source: _cr1265 - introduction of a distinction between systemic and nonsystemic banks.*

### 7.      The BMV has a very low number of listings and the liquidity of these is limited for

### 7.      The BMV has a very low number of listings and the liquidity of these is limited for 

### Market structure and liquidity
- There are only 154 listed domestic companies and ETFs.
- There has been virtually no growth in the number of listings over the past five years, while:
  - market capitalization has increased 30 percent, and
  - trading volumes were up 131 percent (to US$453 million and US$79,986 million, respectively).
- Trading is concentrated in the largest issuers: the five most active issues made up 68 percent of total traded value in 2011.
- Only about 30–40 domestic stocks are considered liquid. (Estimates of the number of liquid issues varied; some industry members said as few as 10, while the BMV estimate was 70–80.)

### Foreign listings and the Sistema Internacional de Cotizaciones (SIC)
- Growth in listings on the BMV has been driven by foreign equities (and some ETFs) listed on the SIC.
- Characteristics of SIC listings:
  - These securities have not been publicly offered in Mexico; are not listed in the Registro Nacional de Valores (RNV); and are listed on foreign securities markets recognized by the CNBV or whose issuers have been approved for listing by the CNBV.
  - The CNBV has recognized exchanges including NASDAQ, the New York Stock Exchange, the London Stock Exchange, the TSX Group, Inc., and the Deutsche Börse AG.
  - Only qualified investors (institutions and high net worth individuals) may purchase securities listed on the SIC.
  - Trades executed through the SIC settle through INDEVAL and are subject to the same operational rules and regulations as other trades executed on the Exchange.
- Number changes over the last five years:
  - Total listings increased by more than 200 percent (from 205 to 649).
  - ETFs listings increased 471 percent (from 55 to 314).
- Trading concentration on the SIC:
  - Trading on the SIC is highly concentrated in the five most active listings; these ETFs made up 58 percent of the total traded value in 2011.

### Trading activity and program trading
- Much of BMV activity comes from program trading orders placed to exploit price asymmetries between markets.
- According to the BMV:
  - Up to 90 percent of total orders in the cash market represent program trading orders.
  - Most program trading orders are cancelled before the trade is completed.
  - The ratio of orders to trades is about 20 to one.
- The BMV has added significant systems capacity to handle the order volume.
- Trading rules and CNBV Securities Firms Rules recently underwent significant changes to:
  - modernize trading rules,
  - permit direct market access to institutional participants through member brokers, and
  - facilitate cross trading.

### Derivatives market (MexDer)
- Listings and volumes over the past five years:
  - Listed options up 450 percent—from 980 to 5,468.
  - Options trading volumes up 36 percent.
  - Listed futures declined 11 percent.
  - Futures trading volume declined 85 percent.
  - Options trading values up 83 percent.
  - Futures trading values down 85 percent.
- The overall decline in futures is largely due to reduced listing and trading interest in interest rate related instruments.
- MexDer officials indicated virtually all trading on the exchange represents trades by institutional investors or proprietary trading by members.

### Collective investment schemes (SIs)
- Number of SIs increased 9 percent over the past five years.
- Assets under management grew to US$102 billion—up almost 60 percent over the same period.
- Most growth (in number of funds and assets) is in equity funds due to greater flexibility:
  - Debt funds may only invest in debt instruments.
  - Equity funds only have to have 20 percent invested in equities; many equity funds operate as balanced funds with varying percentages in both asset types.
- In the two years since the crisis, SIs saw increased flows reflecting that investors in SIs lost less money during the crisis than direct market investors.

### Self-regulatory organizations (SROs) and market intermediaries
- SRO framework:
  - Exchanges and central counterparties are SROs automatically under the LMV.
  - Two other SROs: Asociacion Mexicana de Asesores Independientes de Inversiones (AMAII) and Asociacion Mexicana de Intermediarios Bursatiles (AMIB).
  - AMAII and AMIB operate more as trade associations than SROs; regulatory functions vary by SRO from virtually none to full rule-making and examinations (e.g., MexDer conducts regular examinations).
- Authorized market intermediaries as of end-2010:
  - 41 commercial banks,
  - 6 development banks,
  - 35 securities firms,
  - 41 mutual fund operators, and
  - 5 mutual fund distributors.
  - (Not including banks or securities firms authorized to distribute SIs.)

### CNBV staffing, resources, and preconditions for supervision
- CNBV staffing and compensation:
  - Number of staff at the CNBV has declined and turnover at senior level is high.
  - Staff salaries have been frozen for almost a decade, resulting in a decline in compensation of about 40 percent on a real basis.
  - Salary levels are now well below comparable private sector positions, causing loss of experienced staff especially at senior levels.
  - Loss of expertise and institutional memory is identified as an important problem.
- Preconditions for effective supervision:
  - Stable macroeconomic environment, sound legal and accounting framework, and procedures for efficient resolution of market problems appear to be in place.
  - Bankruptcy of market intermediaries governed by general corporate bankruptcy legislation and operates very slowly.
  - Client assets held at the central depository are protected.
  - It is not clear how central counterparties’ default procedures would work in the event of a brokerage firm or large financial conglomerate bankruptcy.

### Main findings (by IOSCO Principles clusters)
- Principles 1–5 (relating to the regulator):
  - CNBV has clear statutory authority over and responsibility for the securities markets; authority with respect to derivatives markets is less clear-cut and needs express legislation.
  - Operational independence is compromised by lack of resources, the fact that 75 percent of the Board of Governors are appointed by the SHCP and may be dismissed without cause at any time, and lack of statutory immunity for the Commission, its Board and staff.
  - Persons affected by CNBV decisions are afforded rights: right to be heard, to written reasons, and to rights of appeal.
  - Recommended legal changes: permit surprise inspections of any regulated entity; provide additional enforcement powers including enhanced transparency and ability to settle matters.
  - Staff is professional and subject to detailed conduct rules; market participants praised CNBV staff quality and openness.
- Principles 6–7 (relating to self-regulation):
  - Limited use of SROs; regulatory functions vary by SRO.
  - CNBV retains full authority to oversee SRO members and has an appropriate SRO supervision program varying by SRO nature.
  - Exchanges and central counterparties are subject to regular on-site inspections and prior review and approval of rules.
  - MexDer has a compliance officer in charge of member surveillance.
- Principles 8–10 (enforcement):
  - CNBV has broad inspection, investigation and surveillance powers but lacks power to conduct inspections without notice.
  - Investigation inspections may be conducted with same day notice if there is evidence of possible illegal conduct.
  - Active inspection and enforcement programs, both on-site and off-site reviews.
  - Market surveillance is performed in parallel at exchanges and the CNBV.
  - Gaps in enforcement powers should be filled; sanctions across laws should be aligned.
  - Fine levels should be reviewed to ensure consistency and adequate deterrence.
  - Provision restricting disclosure of investigations and enforcement actions should be revised to permit fuller and earlier transparency.
- Principles 11–13 (cooperation in regulation):
  - CNBV can share information and cooperate domestically and internationally, subject to MOUs.
  - CNBV is a signatory to the IOSCO Multilateral MOU and to many bilateral MOUs with counterparts in jurisdictions including the United States, Brazil, Canada, United Kingdom, Argentina, Peru, El Salvador, Venezuela, Panama, Spain, Germany, the Netherlands, and other European countries.
- Principles 14–16 (issuers):
  - Extensive offering and disclosure requirements in place.
  - Public offerings must be listed on the BMV and meet exchange listing standards, LMV and Issuers Rules.
  - BMV and CNBV review issuer prospectuses; continuous disclosure is made public through exchange and Commission facilities.
  - Investors treated equitably regarding voting, access to information, and participation in takeover bids; full information required for takeover bids.
  - Public information available on shareholdings of directors, officers and insiders.
  - Accounting and auditing standards in place; auditors subject to CNBV oversight and detailed independence standards.
  - By the beginning of 2012, public issuers must prepare financial statements using International Financial Reporting Standards (IFRS) and be audited using International Standards of Audit (ISA).
  - Suggested improvements: more timely publication of annual audited financial statements; require electronic publication of shareholder meeting materials to enhance access.
- Principles 17–20 (collective investment schemes):
  - Framework largely compliant: authorization and reporting requirements; all public-offered funds must be registered with CNBV and reviewed via detailed prospectus.
  - Funds must be corporations with assets segregated from operator and distributor.
  - All SIs and their operators and distributors subject to off-site and on-site supervision.
  - Assets of an SI that may be held at a central depository must be so held; central depository is independent.
  - Valuation performed by independent third party providers; continuous disclosure and daily price reporting through BMV required.
  - CNBV can suspend new placements but has no authority to order a fund to suspend or resume redemptions.
- Principles 21–24 (market intermediaries):
  - Licensing and ongoing requirements framework in place; applicants subject to detailed reviews before authorization.
  - Initial and ongoing risk-based capital requirements based on a simplified version of Basel II addressing market, credit and operational risk.
  - Liquidity is subject to separate testing but no specific liquidity capital requirements apply.
  - Recommendations: make capital calculation requirements and prompt reporting of deficiencies more rigorous.
  - Intermediaries must have extensive risk management and internal controls; client assets must be held in segregated accounts at central depositories.
  - Know-your-client and suitability rules apply; conflicts of interest rules need improvement.
  - No plan in place to address broker failure, though law gives CNBV broad powers to act (require reduce business, raise capital, and give notice to clients).
- Principles 25–30 (secondary markets):
  - Exchanges authorized by SHCP with CNBV advice (and BoM for derivatives); alternative trading systems for listed instruments are not permitted.
  - MexDer and central counterparties are subject to minimum capital requirements set via MexDer’s Mandatory Rules; SHCP may set capital requirements for the stock exchange but has not done so.
  - Market surveillance by exchanges and CNBV in parallel; CNBV oversight includes on-site examinations and off-site reviews.
  - CNBV may suspend a stock exchange; SHCP may revoke exchange authorization.
  - There is both pre-trade and post-trade transparency of share prices in real time, but not for fixed income securities.
  - Rules against market abusive transactions are extensive and mechanisms exist to detect improper conduct.
  - Trades on both BMV and MexDer are cleared and settled through central counterparties with detailed and transparent provisions to protect markets against participant default.

*Source: IMF staff report content.*

### Annex Table 12. Summary Implementation of the IOSCO Principles

### _cr1265 - Annex Table 12. Summary Implementation of the IOSCO Principles

### Institutional mandate and coordination
- Principle 1: CNBV has clear statutory authority over securities markets; authority with respect to derivatives markets is less clear-cut and needs to be rectified by the passage of express legislation.
- CONDUSEF is the consumer protection agency in the jurisdiction.
- Overlaps in authority and activities exist between the central bank and the Commission, particularly with respect to derivatives; MOUs are in place and working relationships are good in practice.
- Insurance products functionally equivalent to securities are subject to different rules by the insurance supervisor; no MOU or practical working relationship exists between the two regulators. There is no MOU in place with CONDUSEF. These gaps should be rectified.

### Independence, accountability and resources
- Principle 2: Operational independence is compromised by:
  - lack of resources;
  - the fact that 75 percent of the Board of Governors are appointed by the SHCP and may be dismissed without cause at any time;
  - lack of statutory immunity for the Commission, its Board and staff members.
- Transparency of Commission activities is acceptable but could be enhanced.
- Persons affected by Commission decisions have protections including the right to be heard, to written reasons and to rights of appeal.
- Principle 3: Powers with respect to derivatives need to be settled in law.
- The Commission lacks sufficient expert resources and has no funding autonomy.
- Staff training budgets are sufficient, but salaries have been frozen for nearly a decade and are well below that of the private sector.
- Recommendation: Amend the law to permit surprise inspections and provide additional enforcement powers, including enhanced transparency and settlement ability.
- CONDUSEF lacks the resources and powers to function effectively as a consumer protection authority.

### Regulatory processes, ethics and SROs
- Principle 4: CNBV operates within clear and consistent processes; consultation for rule making is transparent and operated by an independent agency; laws and rules are available on the CNBV website.
- Protections afforded defendants in enforcement may impede effectiveness; Commission should have power to publish full details of enforcement proceedings once the sanction has been imposed.
- Principle 5: Staff observe high standards of professional conduct and are subject to detailed ethical rules both as federal employees and under Commission conduct rules.
- Principle 6: Mexican system makes limited use of SROs; regulatory functions carried out by SROs vary by SRO from virtually none to full rule-making and member examinations.
- Principle 7: CNBV has not delegated functions to any SRO, retains full authority to oversee SRO members and in practice performs the same regulatory reviews; appropriate SRO supervision program exists; exchanges, central counterparties and central depository are subject to regular on-site inspections and rule review/approval.

### Inspection, surveillance and enforcement
- Principle 8: Commission has broad inspection, investigation and surveillance powers; may conduct an investigation visit with same day notice where a breach is suspected, but lacks power to conduct routine inspections of regulated entities without notice.
- Principle 9: Has powers to investigate and act against breaches; gaps exist such as the power to order restatement of financial statements and to disclose details of enforcement proceedings.
- Principle 10: Active inspection and enforcement programs; on-site and off-site reviews performed; market surveillance performed at exchanges and CNBV in parallel; firms must have effective compliance systems.
  - Gaps in enforcement powers should be filled.
  - Sanctions across laws administered by the Commission should be aligned.
  - Fine levels should be reviewed to ensure consistency and effective deterrence.

### Information sharing and international cooperation
- Principle 11: Commission can share information and cooperate with domestic and international regulators, subject to the general requirement that there be an MOU in place; can share confidential information with any other country through an MOU.
- Principle 12: CNBV is a signatory to the IOSCO Multilateral MOU and to many bilateral MOUs with jurisdictions including the United States, Brazil, Argentina and various European countries.
- Principle 13: Commission may provide extensive assistance to foreign supervisors, including obtaining and sharing information and cooperating on inspections; does not require permission of any outside authority to share information and no precondition for an independent interest or dual illegality.

### Disclosure, issuer and investor protection
- Principle 14: Extensive requirements for offering and disclosure documents; public offerings required to be listed on the BMV and subject to exchange listing standards in addition to LMV and Issuers Rules; BMV and CNBV review prospectuses; continuous disclosure documents are made public through exchange facilities.
- Principle 15: Investors treated equitably on voting, access to information and participation in takeover bids; full information required for any takeover bid; public information on shareholdings of directors, officers and other insiders.
  - Recommendation: Enhance access to shareholder meeting materials by requiring electronic publication.
- Principle 16: Accounting and auditing standards in place; auditors subject to CNBV oversight and detailed independence standards.
  - By the beginning of 2012, public issuers will have to prepare financial statements using International Financial Reporting Standards (IFRS) and be audited using International Standards of Audit (ISA).
  - Publication of annual audited financial statements could be more timely.

### Collective investment schemes (SIs) and valuation
- Principle 17: All SIs and their operators and distributors are subject to authorization and reporting requirements, off-site and on-site supervision; regime governing conflicts of interest; required appointment and supervision of service providers (valuation companies and price vendors).
- Principle 18: Funds must be established as corporations with assets segregated from operator and distributor; any asset of an SI held at a central depository must be so held; central depository is independent.
- Principle 19: All publicly offered funds must register with CNBV; prospectus reviewed and must contain full information; SI must prepare a short form key information document; material changes often trigger investor redemption rights prior to change going into effect.
- Principle 20: Valuation by third party service providers authorized and supervised by the Commission; service providers must be independent of the fund and distributor; continuous disclosure of information and prices via fund/operator websites; prices must be reported daily through the BMV’s system.
  - CNBV has authority to suspend new placements.
  - CNBV has no authority to order a fund to suspend or resume redemptions; this gap should be filled.

### Intermediaries, capital and failure procedures
- Principle 21: Framework for licensing and ongoing requirements for market intermediaries in place; applicants subject to detailed reviews; brokers must undergo comprehensive on-site inspections before business commencement.
  - Regime for investment advisors may leave supervisory gaps; CNBV should be given express authority to supervise this activity.
- Principle 22: Initial and ongoing risk-based capital requirements exist based on a simplified version of Basel II addressing market, credit and operational risk; liquidity is subject to separate testing but no specific capital requirements; no specific provisions for legal or reputational risk.
  - CNBV powers to act where problems exist are extensive.
  - Requirements for capital calculations and prompt reporting for intermediaries authorized to trade in derivatives on MexDer are extensive; those for securities brokerage houses should be more rigorous.
- Principle 23: Intermediaries required to have extensive risk management and internal controls; internal audit must review systems annually and report results to the Board and CNBV; client assets held in segregated accounts at central depositories; intermediaries required to know their clients and make suitable recommendations.
  - Rules regarding conflicts of interest need improvement.
- Principle 24: No plan in place to address the failure of a broker; law gives CNBV broad powers to take action against failing firms and require reduction of business, raise capital and give notice to clients.
  - No early warning systems for securities brokers.
  - MOUs facilitate information sharing where failures have cross border implications.

### Exchanges, trading systems, clearing and settlement
- Principle 25: Establishment of stock and derivatives exchanges requires authorization from the SHCP with input from CNBV (and BoM for derivatives exchanges); specified criteria for applicants on systems, infrastructure capacity, technical competence.
  - Alternative trading systems for listed instruments are not permitted.
  - Oversight includes on-site examinations and off-site reviews; all new rules and proposed rule changes for securities require CNBV approval. New rule changes at MexDer require SHCP approval and are also reviewed by BoM and CNBV.
  - On-site reviews are comprehensive and performed regularly.
- Principle 26: CNBV has comprehensive supervision of exchanges including on-site examinations and off-site reviews of rules and trading reports; surveillance by exchanges and CNBV in parallel; CNBV can suspend exchange operations; SHCP can revoke authorization.
- Principle 27: There is both pre-trade and post-trade transparency of prices in real time.
  - Trading rules at BMV were recently modernized to facilitate high frequency trading, faster crossing of large trades and direct market access.
  - Recommendation: Monitor implementation and operation of new rules closely to ensure current transparency is not negatively affected.
- Principle 28: Rules against abusive transactions are extensive; mechanisms exist to detect improper conduct; Commission collects and analyses extensive trading data, receiving daily reports from each broker on each trade executed that day.
  - Sanctions may be too low given market values and should be examined (see Principle 10).
- Principle 29: Trades on both BMV and MexDer are cleared and settled through central counterparties with detailed and transparent provisions to protect markets against a default by any participant.
- Principle 30: Systems for clearing and settlement will be subject to a separate CPSS-IOSCO assessment.

### Authorities’ response
- Mexican financial authorities generally agreed with the conclusions, observations and recommendations regarding implementation of IOSCO Principles in the Mexican financial sector.
- Most written comments on the preliminary draft were included in the final report.
- Authorities consider the exercise a good opportunity to discuss strengths and weaknesses and to draw attention to main issues to be addressed in the future.
- Authorities believe the evaluation of the principles is fair and objective.

*Source: _cr1265 - Annex Table 12. Summary Implementation of the IOSCO Principles*

### 25.      The authorities found the IOSCO report both comprehensive and useful. Also, they

### _cr1265 - 25.      The authorities found the IOSCO report both comprehensive and useful. Also, they

### Authorities' view on the IOSCO report and securities market weaknesses
- The authorities found the IOSCO report both comprehensive and useful.
- They believe that assessors’ advice and proposals will become part of their agenda for the upcoming years.
- The assessment identifies improvements that should be implemented to enhance the performance and development of securities markets.
- The report properly addresses main concerns, which are shared by authorities.
- Authorities agree that two relevant weaknesses of Mexican securities market are:
  - its reduced number of listings
  - its low level of liquidity
- They welcome advice on how to move forward on these weaknesses.
- Authorities agree that high concentration of portfolios might raise concerns, and consider this a characteristic of the Mexican economy as a whole rather than a problem unique to the securities market.
- Authorities share assessors’ view that some enhancement should be made to CNBV’s powers to publish information regarding investigations and sanctions, to improve transparency and strengthen market discipline.
- While Mexico lacks a Law to regulate the domestic derivatives market, authorities believe most recommendations in the report might be implemented through secondary regulation, because the SHCP, Banxico, and CNBV have broad powers to do so.

### Assessment of Principle 14 (disclosure of financial results and material information)
- Authorities regard Mexico as complying with most standards of Principle 14.
- Compliance with this principle is similar to that observed in the most developed markets.
- Authorities are of the opinion that this principle should be assessed as Broadly Implemented (BI).

### IAIS Core Principles — Introduction and methodology
- This is a full assessment of the insurance regulatory and supervisory system in Mexico.
- Produced during a joint IMF, World Bank mission in Mexico during September 8–21, 2011 under the Financial Sector Assessment Program (FSAP).
- Assessment carried out by Rodolfo Wehrhahn (MCM).
- The assessment update was conducted with regard to the circumstances in place and the practices employed on September 21, 2011.
- A new insurance law is expected to be submitted to congress in September 2011; improvements referenced when appropriate, but lack of corresponding secondary regulation and implementation prevented full consideration of LISF.
- Assessment used the International Association of Insurance Supervisors (IAIS) core principles.
- Industry analysis focuses on both life and nonlife insurance companies and excludes the surety business supervised by the CNSF.
- Pension fund industry is mentioned when relevant but not formally assessed.
- Sources included meetings with SHCP, CNSF, CONDUSEF, market participants, trade associations, professional bodies; access to a complete self assessment on the Insurance Core Principles (ICPs) and detailed responses by SHCP and CNSF; official versions of LGISMS and LSCS and CNSF bylaws and Internal Ordinances (Circular Única de Seguros, SSLO).

### Main findings (summary)
- A comprehensive legal and institutional framework supports regulation and supervision of the insurance sector.
  - SHCP sets insurance policy and introduces primary regulation, with strong input from CNSF issuing secondary legislation and supervision.
  - CONDUSEF is entrusted with consumer protection in the financial sector.
- Authorities constantly update legal and supervisory framework to align with international best practice.
  - Major overhaul of the insurance law is in the final stage to be presented to congress.
  - New proposed law will incorporate developments toward a risk sensitive solvency regime and intrusive continuous supervision.
  - A single Rules Book has been developed to harmonize supervision.
- Level of compliance with IAIS principles and CNSF reputation and credibility are high.
  - With only 2 partially observed and 9 largely observed principles out of the 28, Mexico shows a high level of compliance in a post-crisis environment.
  - Transparent processes and open dialogue with industry have created positive reputation for the agency.
  - Powers allocated to CNSF have been used according to procedures with very low level of forbearance.
  - Regular on-site inspections are strongly supported by detailed off-site analysis; data collected at sufficient granularity and used continuously and effectively.
  - Group supervision needs further development, but low complexity and limited number of groups make it less of a priority.
- Significant steps taken toward increased observance of IAIS principles.
  - Promulgation of the proposed LISF is strongly recommended to significantly increase compliance.
  - Principles 6, 9, 10, 15, 16, and 27 will be observed should LISF be passed in its proposed form and properly implemented.
  - Full allocation of currently collected supervisory fees would allow continued well functioning of supervision, including planned regulatory changes to the solvency regime.
- Fiscal budgetary constraints are putting pressure on functioning of supervisory authority.
  - Recent wage freeze created salary levels in CNSF that, compared with the industry, result in a drain of talent and hinder ability to acquire needed expertise.
  - Future performance of CNSF is compromised.
- Continuity of CNSF needs strengthening.
  - Lack of a procedure to appoint the Chairman creates uncertainty and could impact operational independence.
  - Appointment mechanisms of the Chairman and key members need to be established and reasons for removal need to be publicly disclosed when exercised.
- Consumer protection and financial literacy need further development.
  - Efforts by CONDUSEF are positive but impact has been limited, as indicated by broadly similar number of reconciliations over the last years and lack of arbitration activity.
  - Fines and preventive actions observed in the market have limited dissuasive power and need enhancement.

### Conditions for Effective Insurance Supervision (ICP 1)
- Conditions largely met, considering current development of insurance sector.
- Legal and judicial system still struggling to gain full acceptance by market and public.
- CONDUSEF’s conciliation/arbitration is a step in right direction, creating greater acceptance of insurance contracts by consumers.
- Accounting, actuarial, and auditing standards publicly available and in line with international standards.
- Mexican accounting standards are partly more conservative than IFRS, allowing catastrophic reserve to be a liability and recognizing valuation of real estate.
- After years of macroeconomic and financial stability, amount of financial instruments has increased dramatically; further development required to cover demand for investment products (inflation index and U.S. dollar-nominated instrument lag in duration with respect to market demand).
- Laws and regulations permanently updated; SSLO brings all secondary legislation into one document.

### The Supervisory System (ICP 2 to ICP 5)
- CNSF has a broad range of powers but more are needed to increase effectiveness.
  - Powers include ability to issue secondary legislation to preserve solvency, liquidity, financial stability; perform on-site inspections; impose administrative sanctions.
  - Additional powers to be incorporated in new insurance law, including issuing prudential regulations and intervening in liquidation procedures.
  - Current lack of powers to effectively intervene in liquidation procedures could create weakness in protection of policyholders’ rights, especially in absence of a guarantee fund.
- Appointment and removal of CNSF President or Board members is not dictated by law and absence of term of office limits independence.
  - Absence of mandate to disclose dismissal reasons adds vulnerability.
  - CNSF demonstrates technical autonomy but is legally and budgetarily dependent on executive power.
  - CNSF subject to expenditure restrictions applied to all Federal Government entities; does not have full discretion on resource allocation.

### The Supervised Entities (ICP 6 to ICP 10)
- Licensing requirements are numerous, detailed, and transparent; operating without a license is a criminal offense; enforcement cases reported.
- Entities that could create complex supervisory structures or conflicts of interest are ruled out as stockholders (mutual insurers, security brokers, credit organizations, pension administrators, etc.).
- Since 2002, insurance legislation does not allow companies to offer both life and nonlife insurance; due to grandfathering, currently 33 insurers accounting for 58 percent of the market still operate as composite insurers.
  - There are no appropriate measures to guarantee segregated treatment of the risks, particularly in winding-up situations, which could create additional consumer risk.
- The Board is required to appoint a mandatory compliance officer responsible for supervising compliance with internal and external regulatory frameworks.
  - Although law requires sufficient resources, practice shows a stronger internal surveillance entity is required.
  - New law replaces Compliance Officer with an Audit Committee in Article 72 of the LISF project, requiring institutions to have an Audit Committee responsible for monitoring adherence to internal regulations and compliance with applicable laws and administrative provisions.

### Ongoing Supervision (ICP 11 to ICP 17)
- Current insurance and surety legislation does not grant powers to force portfolio transfers; authorities cannot arrange compulsory transfer of policy obligations from a failing insurer to another willing insurer, though they can facilitate transfers where a willing transferee exists.
- Current regulation does not explicitly protect an insurer from financial difficulties affecting its financial group.
  - Regulation includes preventive provisions to protect insurance and surety companies in a group (e.g., prohibition to participate directly or through a third person in authorized stockholders equity of various financial entities).
  - These provisions are helpful but cannot cover all group structures.
- Clear provisions exist for exit and winding up of insurers; policyholders have preference in a wind-up over other creditors.
  - A protection fund exists only for pensions.
  - Resolution is initiated by license revocation followed by administrative winding up or filing of commercial bankruptcy.
  - No requirements exist regarding maximization of value of liquidated assets or efficiency of process, which could create perception that proceedings were not optimized.
- Financial groups are subject to supervision and regulation.
  - Supervision of institutions in same group is carried out by corresponding agency (CNBV, CNSF or CONSAR); SHCF required to nominate leading supervisory agency for the financial group.
  - Leading supervisory agency granted oversight powers that are limited to requirement of information under current legislation.
  - Few requirements on group-wide governance and comprehensive risk management; no group capital concept.
  - CNSF has no direct jurisdiction to supervise unregulated holding companies and must operate indirectly through regulated entities, adding complexity.

### Prudential Requirements (ICP 18 to ICP 23)
- Current Mexican solvency regime is sound and has sufficient level of risk sensitivity to properly assess level of capital required.
- New law will introduce a new solvency regime incorporating stochastic models and calibration very close to Solvency II regime.

### Markets and Consumers (ICP 24 to ICP 27)
- Insufficiently detailed guidelines issued pertaining to offering, sales operations, and financial services of insurance and surety institutions seeking to protect the public.
- Given low insurance penetration and insurance culture in Mexico, more clarity and transparency in contracts is needed to protect consumers.
- CNSF, together with CONDUSEF, should continue and increase efforts in this area.

### AML/CFT (ICP 28)
- AML-CFT requirements applicable to insurers are broadly in line with FATF recommendations.
- In December 2008, GAFISUD issued Mexico’s levels of compliance with FATF 40 Recommendations plus nine Special Recommendations; a follow up document was published in December 2009.
- While level of compliance is high, specific areas need improvement.
- With respect to Recommendation 5 on customer due diligence (CDD), remaining implementation gaps include:
  - No distinction in all cases between CDD requirements for business relationships and all types of occasional transactions, including a direct requirement for aggregating linked occasional transactions.
  - Inadequate provisions in regulations regarding CDD when there are indications and/or certainty of false, erased, or altered identification documents.
  - No direct explicit requirement for financial institutions (FIs) to ascertain/request that applicants for business state whether they are acting on behalf of others.
  - No general requirement for obtaining information on the purpose and nature of business relationships.
- With respect to Recommendation 13 on reporting of suspicious transactions, the obligation to report attempted transactions is not explicitly established in regulations and is not consistently implemented by financial institutions.

### Annex summary (selected points)
- ICP1: Conditions for effective supervision are largely met, considering current development of insurance sector.
- CONDUSEF’s conciliation/arbitration helps acceptance of insurance contracts by consumers.
- Over the last five years, both the number of claims reported and the conciliations have been stable at around

*Source: _cr1265 - 25.      The authorities found the IOSCO report both comprehensive and useful. Also, they*

### 0.5 percent. It appears that more dissemination work on the benefits of

### _cr1265 - 0.5 percent. It appears that more dissemination work on the benefits of

### Accounting, actuarial, auditing standards, and market instruments
- Accounting, actuarial, and auditing standards are publicly available on the relevant professional organization’s website and are commensurate with international standards.
- Mexican accounting standards are partly more conservative than the IFRS, allowing the catastrophic reserve to be a liability, and recognizing the valuation of real estate.
- The actuarial profession is well established with strong professional associations that issue codes and standards that are enforced; close collaboration with the CNSF exists, including actuaries’ certification and continue education programs.
- After several years of macroeconomic financial stability, the amount of financial instruments has increased dramatically; further development is required to cover demand for investment products, in particular inflation index and U.S. dollar-nominated instruments lag in duration with respect to the market demand.
- A new Insurance and Surety Law (Ley de Seguros y de Fianzas, LISF) was submitted to Congress in September 2011.
- The SSLO brings all secondary legislation into one single document.

### Supervisory objectives and authority (ICP2–ICP3)
- ICP2: Policyholders’ interests are central to supervisory objectives, with strong focus on preserving financial stability and solvency and promoting sound development to increase coverage.
- ICP3: The CNSF has ample powers to preserve solvency, liquidity and financial stability, perform on-site inspections, and impose administrative sanctions.
- The relationship with the SHCP is consultative on matters related to the LGISMS and general rules.
- Additional powers proposed in the LISF project to increase effectiveness include the authority to:
  - Issue prudential regulation to preserve solvency, liquidity, and financial stability.
  - Grant, modify, or revoke licenses to operate as an insurance company or mutual insurance society.
  - Determine minimum paid-in capital.
  - Register foreign reinsurers at the General Registry of Foreign Reinsurers.
  - Register insurance adjusters.
  - Authorize portfolio or liability transfers and mergers or splits.
  - Intervene in liquidation procedures of insurance companies and mutual societies.
- Current lack of power to effectively intervene in liquidation procedures could create a weakness in policyholder protection, particularly in the absence of a guarantee fund.

### Internal governance, independence, and accountability (ICP3, ICP9–ICP11)
- A complete Code of Conduct applies to all CNSF officers; violations are sanctioned.
- The CNSF is subject to regular internal and external audits; discrepancies are corrected without delays.
- CNSF holds ISO 9001-2000 Quality Certificate maintained since 2004.
- Appointment and removal of the CNSF President or Board members is not dictated by law and absence of term of office limits independence; there is no mandate to disclose dismissal reasons.
- CNSF demonstrates technical autonomy but is legally and budgetarily dependent on the executive; subject to Federal Government expenditure restrictions that limit full discretion on resource allocation.
- The Board of Directors is required to appoint a mandatory compliance officer who reports annually to CNSF and has direct access to the Board; LISF replaces the Compliance Officer with an Audit Committee (Article 72).
- CEO requires professional experience of at least five years in high decision-taking positions.

### Supervisory process, cooperation, licensing, and scope (ICP4–ICP7, ICP12–ICP13)
- ICP4: Transparency and accountability in the supervisory process are at international levels.
- ICP5: CNSF has entered a large number of MoU including the IAIS Multilateral Memorandum of Understanding (MMoU); active participation in Colleges of supervisors and multinational organizations.
- ICP6: Licensing requirements are numerous, detailed, transparent; operating without a license is a criminal offense; six months return period for license applications; LISF Article 366 aims to transfer licensing powers from SHCP to CNSF to expedite process.
- No insurance and surety activity is out of CNSF supervisory scope, including micro-insurance.
- Since 2002 legislation does not allow operating in both life and nonlife business; due to grandfathering, 33 insurers accounting for 58 percent of the market still operate as composite insurers, with no appropriate measures to ensure segregated treatment of risks in winding-up situations.
- ICP7: Fit and proper requirements for individuals meet international standards; compliance analysis is off-site and monitored continuously; CNSF has a track record of removing high-rank officers when necessary.
- ICP12: Off-site supervision is strong and central to supervisory strategy with sufficient resources.
- ICP13: On-site inspections are supported by law, carried out on a biannual cycle, and followed up through off-site monitoring or subsequent inspections; compliance officer may be required to report monthly to CNSF.

### Changes in control, corporate governance, internal controls (ICP8–ICP11)
- ICP8: Control defined quantitatively (30 percent or more of shares) and qualitatively (dismissal and appointment of the Board); authorization from SHCP required to acquire control. LISF project would lower control threshold to 20 percent and transfer authorization to CNSF.
- Share acquisition reporting: acquisitions >5 percent require SHCP approval with favorable CNSF opinion; acquisitions between 2 percent and 5 percent must notify SHCP within three business days.
- ICP9: Law entrusts management to Board and CEO; compliance officer role required and underperformance sanctioned. LISF introduces Audit Committee (Article 72) to monitor internal regulations and legal compliance.
- ICP10: Internal controls requirements are broad and reviewed at licensing and during on-site inspections; Board implicitly ultimate responsible party for internal controls and risk management; LISF Article 69 explicitly assigns responsibility to the Board and requires underwriting, marketing, product design, disclosure, and service policies.
- Outsourcing is regulated: minimum contract requirements, checks when hiring services, contingency plans; outsourcing does not substitute institution obligations.
- ICP11: CNSF webpage provides sufficient time series and granularity for market analysis and top down stress tests on asset side.

### Preventive measures, enforcement, winding-up (ICP14–ICP16)
- ICP14: CNSF has a wide range of preventive and corrective measures, actively used, can lead to revocation of operating license.
- ICP15: Enforcement powers are large; sanctions include admonition, suspension, restrictive modification, or revocation of license. In the last six years, 422 admonitions were imposed to insurers and 3,148 to intermediaries.
- CNSF can order suspension of dividends, deferment of payments of principal and interests of subordinated liabilities and other credit titles, suspension of operations, and winding up.
- Certain fraudulent behaviors are crimes punishable and reported for prosecution.
- Current legislation does not grant compulsory portfolio transfer powers; CNSF can facilitate transfers when a willing transferee exists.
- CNSF can suspend or remove Board members, compliance officer, CEO, commissaries, directors, managers, fiduciary delegates, and signing functionaries if technical capacity, honorability, or creditworthiness is insufficient.
- Regulation does not explicitly protect insurers from financial difficulties affecting their financial group; preventive provisions exist (prohibition to participate in authorized stockholders equity of certain entities) but cannot cover all group structures.
- ICP16: Clear provisions for exit and winding up; policyholders have preference in windup over other creditors. A protection fund exists only for pensions. Failing entities addressed by license revocation with administrative winding up or commercial bankruptcy. No requirements exist for maximization of value of liquidated assets or process efficiency.

### Group-wide supervision, risk assessment, and capital adequacy (ICP17–ICP23)
- ICP17: Financial groups are subject to supervision and regulation by CNBV, CNSF, or CONSAR; SHCF nominates the leading supervisory agency which currently is often CNBV. Leading agency’s oversight powers are limited to information requirement under current legislation.
- CNBV can establish agreements for information exchange; CNSF lacks the same power, creating difficulties in information sharing.
- Few requirements exist on group-wide governance and comprehensive risk management; no group capital concept.
- For insurance groups, consolidated financial information of subsidiaries is required and available on the CNSF website.
- CNSF has no direct jurisdiction to supervise unregulated holding companies; must operate indirectly through regulated entities.
- ICP18: Current regulation has strong requirements on individual risk management but little on integrated enterprise-level risk management; LISF highlights the need to integrate strategy, operations, and risk management. Current regulation does not require insurers to adapt risk management/internal controls as business complexity increases.
- ICP20: Law requires financial reporting and establishment of adequate technical provisions following CONAC and CINIF practices, complemented by CNSF; insurers required to carry out stress tests for solvency and liquidity.
- ICP21: Regulatory regime addresses valuation of technical provisions, capital requirements, suitable forms of capital, quality and liquidity of assets, and asset-liability matching. Insurance and surety companies cannot invest directly outside the country but can invest in foreign securities traded through the SIC (International Quotation System of the Mexican Stock Exchange, BMV).
- ICP22: Derivatives and similar commitments—international best practice.
- ICP23: Current solvency regime is sound and sufficiently risk sensitive; over the last 10 years there were 18 insolvencies (most voluntary). Currently companies have a solvency margin of less than 110 percent (eight insurers with a market share of 4.3 percent), and only one requiring capital. The new law will introduce a solvency regime incorporating stochastic models calibrated very close to Solvency II regime.

### Intermediaries, consumer protection, disclosure, and fraud (ICP24–ICP27)
- ICP24: Insurance intermediation is regulated and requires CNSF authorization; around 30 percent of intermediaries pass the examination.
- ICP25: CONDUSEF empowered by LPDUSF to promote, advise, protect, and defend users’ rights; to arbitrate differences and provide legal security in relations with financial institutions. As of 2009, CONDUSEF can impose monetary sanctions for violations of LPDUSF. Since 2011, CONDUSEF can initiate class actions.
- CONDUSEF provides educational information, surveys, presentations, publications, a dedicated complaints line, and physical presence in all States.
- CONDUSEF scrutinizes adhesion contracts for simplicity, fairness, and clarity and provides price comparisons.
- Conciliation procedure is free; arbitration is available but unused—over the last five years approximately 8,000 conciliations have been provided but no insurer has agreed to arbitration.
- Monitoring of misleading advertising appears to have no dedicated resources at CNSF or CONDUSEF; only sporadic cases have led to modification or suspension.
- Minimum disclosure requirements exist for intermediaries, including disclosure of commissions at request; more detailed guidelines on offering and sale operations are needed given low insurance literacy.
- Given low insurance penetration and culture, more clarity and transparency in contracts is needed; CNSF together with CONDUSEF should continue and increase efforts.
- Federal Law on the Protection of Personal Data in the Possession of Private Parties guarantees privacy; intermediaries must treat personal data confidentially; breaches can motivate a demand for moral damage.

- ICP27: Fraud is treated as generic fraud under Mexican legislation; LGISMS identifies actions considered fraud punishable by imprisonment for up to 15 years and fines up to the amount of 100,000 minimum day salaries.
- Companies use databases to exchange information on possible fraudulent applicants in life and health lines. No explicit legal power for CNSF to require specific anti-fraud measures or counter-fraud training for intermediaries or institutions, but CNSF can cooperate with other supervisory and fraud-combat authorities.

### Anti-money-laundering and combating the financing of terrorism (ICP28)
- AML-CFT requirements applicable to insurers are broadly in line with the FATF recommendations.
- In December 2008, GAFISUD issued Mexico’s levels of compliance with the FATF 40 Recommendations plus 9 Special Recommendations; a follow-up document was published in December 2009. While compliance level is high, specific areas need improvement.
- Gaps in Recommendation 5 (customer due diligence) include:
  - No distinction in all cases between CDD requirements for business relationships and all types of occasional transactions, including a direct requirement for aggregating linked occasional transactions.
  - Inadequate provisions regarding CDD when there are indications and/or certainty of false, erased, or altered identification documents.
  - No direct explicit requirement for FIs to ascertain/request that applicants state whether they are acting on behalf of others.
  - No general requirement for obtaining information on the purpose and nature of business relationships.
- Recommendation 13 (reporting of suspicious transactions): Obligation to report attempted transactions is not explicitly established in regulations and is not consistently implemented by financial institutions.

*Source: _cr1265 - 0.5 percent. It appears that more dissemination work on the benefits of (PDF).*

### Annex Table 14. Mexico: Recommended Action Plan to Improve Observance of

### Annex Table 14. Mexico: Recommended Action Plan to Improve Observance of the Insurance Core Principles

### Recommended actions by ICP (summary)
- ICP 2
  - Promote a sound development of the surety and insurance sectors to increase service coverage given low insurance penetration in Mexico.
  - Possible measures: implement mandatory motor third-party liability and promote new types of micro-insurance.
- ICP 3
  - Approve the LISF to grant required powers to the CNSF for more efficient supervision.
  - Introduce an explicit mechanism for the appointment or withdrawal of the CNSF’s president or Board members; mandate publication of removal reasons whenever the president or a Board member is dismissed.
  - Consider introduction of a term of office.
  - Grant the supervisory authority full discretion on resource allocation in accordance with its mandate, objectives, and perceived risks.
  - Enable the supervisory agency to hire key senior technical staff (including consulting arrangements or direct salary supplements) particularly when the new solvency regime enters into force.
- ICP 6
  - Introduce appropriate measures to warrant segregated treatment of risks on both a going-concern and a winding-up situation.
- ICPs 9 & 10
  - Pass the new law strengthening corporate governance and internal controls of supervised entities.
  - Adopt a more intrusive supervisory approach to permit proper monitoring and enforcement of new governance and internal controls requirements; this will require additional resources.
- ICP 13
  - Current inspection intensity is sufficient for required compliance levels.
  - As the second pillar of the proposed solvency regime is implemented, require a significant change in intrusiveness of inspection.
  - Allocate inspectors dedicated to a given company to achieve necessary understanding of activities to assess compliance in investments, governance, risk management, and internal models.
  - Additional resources will be required.
- ICP 14
  - Complement the extensive list of circumstances that lead to preventive and corrective measures by introducing a general principle in the new law stating as grounds any circumstance affecting the solvency of the company or undermining policyholders’ rights.
  - The current proposed LISP includes this recommendation.
- ICP 15
  - Consider providing the CNSF with power to arrange a compulsory transfer of obligations under policies from a failing insurer to another willing insurer (explicitly addressed in Article 485 of the new proposed law).
  - Current regulation does not explicitly protect an insurer from effects of financial difficulties affecting the financial group to which it belongs; address this in the LARF.
- ICP 16
  - Include requirements to maximize the value of liquidated assets and on the efficiency of the winding-up process in the law to improve insurer winding up procedures (Article 393 of the LISF covers this recommendation).
  - Recommend amending the law to authorize the supervisor to prescribe a time within which noncompliance must be rectified, allowing customization to the nature of the problem.
- ICP 17
  - Incorporate requirements on group-wide governance, comprehensive risk management, and group capital in the LARF.
  - Consider including regulation of holding companies of insurance groups in the LARF to obtain requested financial and business information.
- ICP 18
  - Formalize requirement to have a Risk Committee when a defined complexity and/or size of the institution are reached (as recommended in the LISF).
- ICP 19
  - Improve efficiency of revision and correction of technical errors in large amounts of technical notes by strictly acting on unqualified actuaries providing technical notes.
  - Transfer setting of retention limits to the CNSF to expedite implementation and allow possibly higher update frequency (Article 258 of the LISF addressed this point).
- ICP 20
  - CNSF should provide prudential guidance on accounting for reinsurance recoverable and on assets backing catastrophic reserves that could require investments outside the country.
  - Further consider concentration risk in the case of affiliated parties.
- ICP 21
  - New law allows more flexibility, but compliance analysis with prudent person requirements will demand higher expertise from companies and the CNSF.
  - Recommend training and hiring of experienced professionals at CNSF to avoid unnoticed increases in investment risk exposure of insurers.
  - Additional resources will be required.
- ICP 23
  - As regulation moves into a Solvency II type regime, do not underestimate preparation and expertise required from both industry and CNSF to avoid a black box regime.
  - The complexity of the standard model could create false confidence in capital levels; prioritize simplicity and applicability of the standard model.
  - As internal model approval starts, ensure additional care in understanding models.
- ICP 24
  - Certification of brokers could be authorized to other respected entities like the brokers association to free CNSF resources without adding systemic risk.
- ICP 25
  - Assess appropriateness of resources in CONDUSEF.
  - Revisit arbitration mechanism to encourage use.
  - Issue more detailed guidelines on offering, sales operations, and financial services of insurance and surety institutions to protect the public given existing insurance literacy.
  - Given low insurance penetration and insurance culture in Mexico, require more clarity and transparency in contracts to protect insurance consumers; CNSF together with CONDUSEF should continue to increase efforts.
- ICP 27
  - New law should grant explicit power to CNSF to require intermediaries or institutions to have specific measures to prevent or detect fraud, including counter-fraud training for management and staff (included in current proposed law).
- ICP 28
  - Implement the missing AML-CFT requirements of the FATF recommendations.

### Authorities’ response to the assessment (key points)
- Mexican financial authorities welcome the detailed assessment on observance of IAIS Insurance Core Principles by the FSAP mission and share the mission’s views overall.
- Various suggestions to improve regulatory and supervisory frameworks were already under consideration and were taken into account in developing the LISF Project.
- Implementation of the LISF Project will result in a higher level of observance of most ICPs, as assessed in the FSAP.
- Recommendations regarding ICPs 6, 9, 10, 15, 16, and 27 (assessed as largely observed) have already been addressed, totally or partially, in the LISF Project.
- Dialogue with the FSAP mission will facilitate moving forward with recommended actions related to ICP 3.
- SHCP, CNSF, and CONDUSEF are aware of recommendations to improve ICP 25 observance; implementation will include elements in the LISF Project and additional measures.

### Payment and securities settlement systems: overview and methodology (selected findings)
- Information and methodology used:
  - Assessment used relevant laws, rules, and procedures, documents provided by authorities, and discussions with Bank of Mexico (BoM), CNBV, commercial banks, BMV group, and other stakeholders.
  - Mission used the “Red Book – 2011” (CPSS, BIS) and World Bank Global Payment System Survey 2010 responses.
  - Methodology references: 2001 CPSS-CPSIPS Report; Guidance Note for Assessing Observance of CPSIPS (IMF/WB/CPSS, August 2001); for SSS: 2001 CPSS-IOSCO RSSS, 2002 CPSS-IOSCO Assessment Methodology for RSSS, 2004 CPSS-IOSCO RCCP.
  - Assessment conducted in the context of the FSAP Update to Mexico (October 2011). Assessor: Massimo Cirasino.
- BoM’s role and main components:
  - BoM has led development of a comprehensive, resilient, and efficient National Payments System (NPS).
  - BoM operates SPEI, SIAC, SICAM, and the depository for government securities.
  - BMV group owns/operates corporate securities market components: stock exchange, CCP, CSD, securities settlement system.
  - Retail payment systems include ACH operated by CECOBAN and two inter-connected card payment switches (PROSA and EGlobal).
- Legal and regulatory framework covers:
  - Clarity of timing and finality of settlements; recognition of electronic processing; legal recognition of netting; non-existence of zero hour rules in insolvency; protection for collateral pledged; fair and competitive practices; consumer protection.
  - Securities settlement specifics: immobilization of securities; securities ownership transfers and finality; novation; protection of custody arrangements; securities lending arrangements; protection of SSS from participant insolvency.
- Finality of foreign payments:
  - Credit institutions act provides finality of settlements through foreign payment systems considered final and irrevocable under governing laws (e.g., CLS).

### Large-value systems: SPEI, SIAC, SICAM, DALI (operational features and statistics)
- SPEI operational features:
  - SPEI is a near real-time hybrid settlement system operated by BoM, processing a wide range of high- and low-value payments and providing settlement facilities for DALI and CLS.
  - Participants operate cash accounts in SPEI and place credit transfer transactions for settlement in queues.
  - SPEI runs a multi-lateral offsetting algorithm roughly every 20 seconds to select transactions that can be settled based on available balances, clearing and settling those transactions as a batch.
  - Transactions are reflected on a gross basis in respective accounts; accounts can be over-draft after a transaction but algorithm ensures no over-draft at end of settlement cycle.
  - There are no penalties for transactions remaining in queue; unsettled transactions at end-of-day are cancelled.
  - SPEI opens at 7:00 p.m. on a previous banking business day for the next value date until 5.30 p.m. of the value date.
- Integration and settlement relations:
  - SPEI, DALI, and SIAC are closely integrated; participants can transfer balances online among their SPEI, SIAC, or DALI cash accounts.
  - DALI operates cash settlement accounts for participants and is itself a SPEI participant; consolidated DALI positions are reflected in its SPEI account.
- Annex Table 15. Mexico: SPEI and DALI System Statistics (as presented)
  - DALI
    - 2009 Volume (millions): 1/
    - 2009 Value (in trillions MXN): 2.1
    - 2010 Volume (millions): 499.8
    - 2010 Value (in trillions MXN): 2.3
    - 2011 (Jan-Aug 2011) Volume (millions): 499.6
    - 2011 (Jan-Aug 2011) Value (in trillions MXN): 1.78
    - Note: 1/ Statistics does not include repos and intra-system transfers and funds transfers to other systems.
  - SPEI
    - 2009 Volume (millions): 62.2
    - 2009 Value (in trillions MXN): 128.5
    - 2010 Volume (millions): 85.8
    - 2010 Value (in trillions MXN): 153.1
    - 2011 (Jan-Aug 2011) Volume (millions): 69.8
    - 2011 (Jan-Aug 2011) Value (in trillions MXN): 115.7

*Annex Table 14. Mexico: Recommended Action Plan to Improve Observance of the Insurance Core Principles (IMF staff report content).*

### 11. The SPEI participants send transactions to SPEI in a proprietary format over a

### 11. The SPEI participants send transactions to SPEI in a proprietary format over a

### SPEI messaging, security, and connectivity
- SPEI participants send transactions to SPEI in a proprietary format over a BoM-operated private network using TCP/IP protocol.
- As a back-up, participants can use the internet to send transactions.
- All messages are digitally signed based on a public key infrastructure operated by BoM.
- The messages are also encrypted during transmission to SPEI.
- The CLS uses SWIFT message format to send transactions to BoM, which then presents the transaction into SPEI.

### Business continuity, operational resilience, and pricing
- SPEI has a well-defined business continuity plan and targets a recovery within 120 minutes.
- SPEI has a fully functional secondary site where all transactions are backed up online and in real time.
- Pricing aims at full-cost recovery and incentivizes early introduction of transactions.
- The rules require prompt processing of customer instructions and payments to beneficiaries.

### Foreign exchange market structure and CLS participation
- High volumes traded on the Mex$-US$ market have led authorities to participate in the CLS Settlement system.
- About 40 percent of the overall volume of the Mex$-US$ market is cleared and settled through CLS.
- The remaining part is managed through correspondent banking arrangements without an effective Payment vs. Payment (PvP) arrangement.
- Major banks that are subsidiaries of CLS participants settle operations through CLS; no locally owned banks are currently participating in the system.

### Retail payment systems — CCEN (CECOBAN)
- CECOBAN operates CCEN, an ACH for clearing and settling checks, credit transfers, and debit transfers.
- CCEN clears and settles Mex$- and US$-denominated checks on a T+1 basis and uses check truncation.
- CCEN clears and settles Mex$-denominated direct debits and credit transfers on a T+1 basis.
- CCEN performs a combined net settlement for checks, credit transfers, and direct debits using SICAM, and uses partial unwinding to handle settlement failures.
- Banks have enough time to stop payments when instructions are unwound.
- CCEN charges a consolidated fee for all three services: a monthly fee that covers the first 10,000 transactions; for transactions above this number, a volume-based progressive decreasing fee is applied starting from Mex$0.55 to Mex$0.10 per transaction.

### Liquidity and credit limits
- BoM has established limits for the credit lines that can be extended in SICAM.
- BoM has set maximum limits based on the participants’ net capital on both the value of individual credit lines and total value of credit lines that a participant can extend to other participants.

### POS and ATM switches, card market
- The Mexican cards market is dominated by international brands; processing of domestic transactions is done by two inter-operable switches operated by domestic banking consortiums.
- The card payments infrastructure is fully inter-operable.
- BoM has been actively overseeing the card payments markets and has applied moral suasion interventions in recent years.
- PROSA and EGlobal settle the card transactions on a T+1 basis in commercial bank money and notionally guarantee settlement; the only formal settlement guarantee is provided by the international card brands.

### Foreign exchange market statistics (Annex Table 16)
- Total traded amounts (millions of U.S. dollars): 3,205,829 (2009); 5,266,9016,579,809 (2008); 5,780,176 (2007); 4,875,522 (2006); 4,718,237 (2005); [table formatting in source].
- Over The Counter (OTC) market 1/ (millions of U.S. dollars): 2,286,113 (2009); 3,550,8035,100,8884,488,130 (2008); 3,685,674 (2007); 3,532,702 (2006) [table formatting in source].
- Exchange-traded CME 2/ (million of USD dollars): 160,276 (2009); 250,405236,934174,473 (2008); 171,978 (2007); 148,496 (2006) [table formatting in source].
- Exchange-traded MexDer 3/ (millions of U.S. dollars): 15,463 (2009); 33,64031,62059,946 (2008); 29,727 (2007); 19,764 (2006) [table formatting in source].
- Spot 4/ (millions of U.S. dollars): 743,977 (2009); 1,432,0531,210,3671,057,627 (2008); 988,143 (2007); 1,017,275 (2006) [table formatting in source].
- Source: Bank of Mexico answer to the Global Payment Systems Survey 2010.
- Footnotes preserved as in source: 1/ Total traded amounts in the local FX derivatives market. They account approximately for one-half of the total amounts traded globally. 2/ Amounts traded in the Chicago Mercantile Exchange (CME). Although CME is not a Mexican exchange, those are the most representative amounts of the global volume of peso exchange-traded derivatives. 3/ Amounts traded in MexDer, which is the only Mexican centralized foreign currency derivatives exchange. 4/ Total traded amounts in the local market. They account approximately for one-third of the total amounts traded globally.

### Securities settlement systems (BMV, DALI, INDEVAL, MexDer)
- BMV is the single stock exchange for trading a range of equity instruments and settles on a rolling T+3 basis for stocks.
- Equity instruments on BMV include domestic equities, foreign equities registered in Sistema Internacional de Cotizaciones (SIC), convertible bonds, domestic mutual funds, and Exchange Traded Funds (ETF).
- At end-2009, Mexican equity markets had a total market capitalization of Mex$4.6 trillion, around 40 percent of Mexican GDP.
- The daily average trading volume in BMV exchange was over Mex$7 billion.
- Government securities transactions are traded over the counter; BoM, as agent of the SHCP, manages all government debt issuance.
- Secondary market transactions are conducted wholly over the counter and counterparties report the trade to the DALI system, whereupon matching places it in a queue for settlement.
- DALI settles operations in DVP model 3 frequently and runs its clearing and settlement process at least every 2 minutes, or sooner if thresholds are reached.
- DALI runs an optimal clearing algorithm to determine the highest amount that can be cleared and settled with available participants’ balances; transactions that cannot be settled are retained for subsequent cycles.
- MexDer is the single exchange for fixed-income, equity, and currency derivatives; derivatives include futures on government bonds, interest rate futures based on the inter-bank interest rate, U.S. dollar and Euro futures, futures on stocks, Mexican stock exchange index, and options on stocks and U.S. dollars.
- All equity and debt securities are immobilized in INDEVAL, which functions as the CSD for all securities in Mexico.
- Mexican law requires physical issuance of securities, which can then be immobilized.
- Safekeeping of physical securities for government securities is managed by BoM and Registro Nacional de Valores (RNV) for other securities.
- Securities and derivatives markets have different CCPs; all accepted trades are novated at the respective CCPs and settled through DALI.

### Oversight framework and assessment approach
- BoM has designated the SPEI, SIAC, and the DALI system as systemically important and requires them to comply with relevant international standards.
- SPEI and SIAC are required to be compliant with the CPSS Core Principles for Systemically Important Payment Systems (CPSIPS).
- DALI is required to comply with the CPSS IOSCO Recommendations for Securities Settlement Systems (RSSS).
- BoM has very limited oversight powers over the ASSIGNA system, which functions as the CCP for the derivatives market.
- The assessment of systemically important payment systems used a qualitative five-fold categorization: observed, broadly observed, partly observed, non-observed, and not applicable.
- Recommended actions are presented in Annex Table 17 and Annex Table 18 (summarized below).

### Main findings from the assessment
- SPEI, SIAC, and DALI systems have been classified as systemically important by BoM.
- SPEI and SIAC were assessed against CPSS CPSIPS; DALI was assessed against CPSS-IOSCO RSSS.
- The SPEI fully observes 9 of the 10 principles, with one being not applicable.
- The SIAC fully observes 8 of the 10 principles, with one being not applicable and CP8 broadly observed.
- Central bank responsibilities A, B, and C are fully observed; responsibility D is broadly observed.
- BoM and the CNBV have no formal MOU or similar mechanism to collaborate in the oversight of all payments and securities settlement systems; establishing such mechanism would make responsibility D fully observed.
- Participants must manage liquidity across SPEI, DALI, and SIAC; better integration or moving all funds settlement to SPEI could increase NPS efficiency.
- Longer operating hours for the DALI system would meet important market needs.
- Assessors recommend BoM consider formalizing collaboration with the SHCP and the CNBV, potentially via the Financial Stability Committee with a dedicated sub-committee for payment and securities settlement systems.

### Recommended actions (summarized from Annex Tables 17 and 18)
- Core principle 1 (Legal foundation): Consider listing SPEI permanently as SIPS instead of annually; revisit value-based criteria for designating a system as SIPS.
- Core principle 7 (Security and operational reliability): Strengthen BCP arrangements for SPEI by requiring participant institutions to certify their BCP arrangements.
- Core principle 8 (Efficiency and practicality): Consider integrating cash settlement accounts in SIAC and DALI more closely with SPEI; potentially move SIAC payment functionality into SPEI or eliminate separate DALI cash accounts.
- Central Bank responsibilities A, B, C, D: Consider making classification criteria for SIPS more general (not based on specific hard numbers); formalize collaboration with MOF and CNBV, possibly via a Financial Stability Board sub-committee.
- RSSS 3: Conduct detailed cost-benefit assessment of moving to a shorter cycle for corporate securities settlement; consider moving to a shorter settlement cycle if benefits outweigh costs.
- RSSS 4: Conduct detailed cost-benefit assessment on using CCP arrangements for government securities; institute CCP arrangements if benefits outweigh costs. Ensure existing CCP arrangements for corporate securities and derivatives are fully compliant with the RCCP.
- RSSS 11 and RSSS 15: Address that data replication between primary and secondary site systems are not online; risk of losing transactions processed between consecutive replications. INDEVAL should develop detailed procedures to handle this if online replication is not feasible.

### Authorities’ response to the assessment (BoM positions)
- BoM generally shares the views and main findings and finds recommended actions useful; will take some as guidance for future NPS improvements.
- On Core Principle 1: BoM does not fully agree; making SPEI permanently SIPS would require amending the Payment System Act, which BoM views as a higher-effort change compared with annual publication of SPEI as SIPS.
- On Core Principle 7: BoM largely agrees but prefers BCP certification apply only to the most relevant SPEI participants, determined by amount/number of payments, interconnectedness, criticality, etc.
- On Core Principle 8: BoM agrees and is working on changes to make SIAC comply with suggestions; however, BoM assessed eliminating DALI cash accounts and moving all settlement to SPEI would not yield efficiency gains that justify implementation costs.
- On Central Bank responsibilities: BoM believes current PSA criteria/procedures to define systemically important systems are clear and useful; changing PSA would require amendment and BoM considers benefits would not offset costs. BoM emphasizes efficiency when each authority performs its mandate and notes statutory responsibility for overseeing the NPS lies with BoM.
- On RSSS 3: Settlement cycle was changed from T+2 to T+3 following a joint market request; BoM considers reducing the settlement cycle counterproductive.
- On RSSS 4: BoM has performed past cost-benefit assessments on CCP arrangements for debt markets and will continue to analyze benefits as the market evolves; BoM is working with CCV to make equity market CCP fully compliant with IOSCO-CPSS RCCP.
- On RSSS 11 and 15: BoM agrees DALI must not lose relevant information in a disruption and has been working with INDEVAL to strengthen DALI’s BCP arrangements.

*Source: _cr1265 - 11. The SPEI participants send transactions to SPEI in a proprietary format over a; IMF mission report excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1265.pdf_