MEXICO Trends and Developments Contributed by: Pablo Perezalonso Eguía, Isabel Ortiz-Monasterio Borbolla and Alejandro Mosqueda Pérez, Ritch, Mueller y Nicolau, S.C.
the 90s, financial authorities realised that it was fundamental to begin to develop a repo market in Mexico, starting with banks. Yet, conceptually, there were certain barriers to overcome. Firstly, it is important to clarify that a Mexican reporto is not the same as a standard repurchase transaction, although it shares similarities with a sale and buy-back agreement. Under the Nego - tiable Instruments Law, a reporto involves one party, the Reportador (the “Purchaser”), acquir - ing ownership of securities from another party, the Reportado (the “Seller”), for a set price (the “Price”). The Seller is obligated to repurchase the same or equivalent securities on a speci - fied date for the Price plus a premium (the “Pre - mium”). In reporto transactions, the Purchaser receives title to the securities, and unless other - wise agreed, any interest or distributions gener - ated by the securities during the reporto period are credited to the Seller. While reportos and buy/sell back, repo and reverse repo transactions are similar, there are key distinctions: (i) in reporto transactions, the Seller must provide additional collateral (which may be a different type of asset) in certain cas - es as outlined by the Reporto Regulations; and (ii) local agreements differ in structure, defined terms, payment instructions, delivery of securi - ties, and margin delivery mechanics compared to the GMRA. Notably, the Reporto Regula - tions permit the application of GMRA margin provisions when dealing with foreign financial institutions. Furthermore, Mexican law impos - es additional requirements for the enforceabil - ity of collateral located within the country. In a Mexican reporto , the securities transferred by the Seller are not considered collateral. Collat - eral refers to the additional cash or securities pledged to secure the transaction.
As mentioned, collateral in reporto transactions differs from the underlying security. A reporto is not classified as a secured loan, and the underly - ing securities are not treated as collateral. Col - lateral is required when certain risk thresholds are reached, and in transactions lasting more than three business days, margin requirements must be met. Note that in this article, the authors use reportos and repos interchangeably despite their techni - cal differences. Reportos are always governed by the Negotiable Instruments Law. Reporto transactions entered by Mexican financial entities such as banks, broker-dealers, pension funds, non-bank finan - cial institutions, insurance companies, bonding companies, and mutual funds, must comply with the Reporto Regulations and be conducted with other financial institutions or institutional inves - tors. While the Negotiable Instruments Law provides the general legal framework for repo transac - tions, the Reporto Regulations establish uniform rules regarding contracting conditions, eligible counterparties, the types of securities allowed, early termination rights, and collateral require - ments for certain reportos . One of the main obligations under the Reporto Regulations is that Mexican financial entities such as banks, broker-dealers, pension funds, regulated non-bank banks, insurance compa - nies, bonding companies and mutual funds must use the Contrato Marco para Operaciones de Compraventa de Valores y Reporto (the “Local Reporto Master Agreement”), issued by the Mexican Banks Association (the ABM) and the Mexican Broker Dealers Association (the AMIB), for all repo transactions with other financial
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