MEXICO Law and Practice Contributed by: Carlos de la Garza, Raúl Acosta and Enrique Tamez, De la Garza & Acosta Abogados, S.C.
National Insurance and Bonding Commission in the Sole Insurance and Bonding Circular and its Annexes, with the approval of their board of directors. Securities transactions conducted by insurance institutions in the fulfilment of trusts, mandates and administration contracts must comply with the provi- sions of the Insurance and Bonding Institutions Law and the Securities Market Law ( Ley del Mercado de Valores ), and, where applicable, in accordance with the guidelines established by the Bank of Mexico ( Banco de México ). The Sole Insurance and Bonding Circular and its Annexes define the transfer of portions of a technical insurance risk portfolio to the capital market as an operation in which an insurance institution, through a contract, transfers part of the risk from its portfolio of technical insurance risks to a Special Purpose Vehi- cle for Insurance ( Vehículo de Propósito Especial de Seguros ). This includes transferring the funds corre- sponding to the coverage of the transferred risks. The Special Purpose Vehicle then finances its exposure to these risks by issuing debt securities on author- ised stock exchanges, as regulated by the Securities Market Law. The funds raised from these securities are managed to cover the payments the insurance institution is required to make under the transferred risks, as specified in the contract. Importantly, the repayment rights of investors are subordinated to the Special Purpose Vehicle’s payment obligations to the insurance institution. Such operations must consider the following. • Funding of the Special Purpose Vehicle for Insur- ance. • The Special Purpose Vehicle for Insurance must hold assets derived from the placement of debt securities on authorised stock exchanges, in compliance with the Securities Market Law. These assets must exceed by 10% the sum of: (a) the maximum liability that could arise from exposure to the transferred portion of the tech- nical insurance risk portfolio; and (b) the fees, commissions and expenses neces- sary for its operation.
• The rights of the holders of the securities issued by the Special Purpose Vehicle for Insurance over its administered assets are subordinated to the payments the Vehicle must make to the insurance institution as part of the operation. • The assets managed by the Special Purpose Vehi- cle for Insurance must comply with specific invest- ment criteria, including: (a) consistency with the nature, duration and currency of the underlying obligations in the operation; (b) maintenance of appropriate diversification and counterparty risk strategies; and (c) ensuring liquidity. All of the above are subject to approval by the National Insurance and Bonding Commission and the Nation- al Banking and Securities Commission ( Comisión Nacional Bancaria y de Valores ). Operations involving the transfer of portions of a tech- nical insurance risk portfolio to the capital market must be documented through trust contracts. These contracts must serve a purpose exclusively aligned with the requirements outlined in the Sole Insurance and Bonding Circular and its Annexes. Furthermore, they must adhere to the specified characteristics to ensure they are not classified as reinsurance opera- tions. The fiduciary institution and the brokerage house responsible for placing the securities issued by the Special Purpose Vehicle for Insurance must have no business ties or financial connections with the insur- ance institution conducting the transfer. They are also subject to rigorous oversight. 7.2 Foreign ART Transactions The Insurance and Bonding Institutions Law express- ly limits the activities that insurance companies can undertake. Therefore, as the possibility for insurance institutions to carry out alternative risk transfer opera- tions abroad is not provided for, such activities are not permitted, since they are also not envisaged in the Sole Insurance and Bonding Circular and its Annexes.
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