MEXICO CREATES IQS FOR FOREIGN STOCKS
By:
Edgar Garza-Morales
New York
Alejandro Garc'a Villalpando
Mexico City
Regulation of the Mexican financial services market has been changing rapidly over the past few years in order to promote the emergence of a more open financial services market. In some areas, the regulatory changes are complete. These legal changes have paralleled the overall opening of Mexico's economy that began in the mid-eighties but were accelerated by specific commitments Mexico agreed to in NAFTA and, in some cases, by the severe recession of 1995. NAFTA and earlier amendments opened Mexico's financial services industry to direct investment for foreign investors. Last year Mexico began the privatization of its social security system and, significantly, allowed foreign financial firms to participate in the privatization process by allowing such firms to manage retirement funds. The past few months, Mexico further liberalized its financial services markets by permitting shares registered on foreign exchanges to be offered in Mexico to institutional investors, such as financial intermediaries and mutual funds.
Articles 107 and 108 of the Ley del Mercado de Valores (Stock Market Law) envisioned the creation of a system of international listings designed to permit Mexican brokers to purchase and sell certain securities to certain entities. The system is called the sistema internacional de cotizaciones (the international quotation system, or IQS) and is designed to facilitate the trading of foreign shares in Mexico. Despite the legal basis in the Stock Market Law, the regulatory framework remained incomplete, due to the severe economic crises in Mexico during 1995. The first step in the process was the publication in April of rules regarding how shares could be listed on the IQS. The second was the publication in August of rules for Mutual Funds.
Two categories of shares may be listed in the International Quotation System. For certain exchanges, so-called Recognized Markets (including the American, Amsterdam, Australian, London, Montreal, New York, Tokyo and Hong Kong exchanges, and the Bolsa de Valores de Madrid and Milano), the shares may be listed after a Mexican broker-dealer completes a relatively simple form. For shares listed on Unrecognized Exchanges, the process is more complicated. The main regulator, the Comisi-n Nacional Bancaria y de Valores, must conclude that both the market on which such shares are traded and the shares themselves are sufficiently sound so as not to prejudice the Mexican market or investors in the home market.
After a share is listed on the IQS, any Mexican broker-dealer may purchase such shares on the relevant foreign market. A broker-dealer would first purchase the shares from a foreign intermediary, who would then deposit the shares in an account that S.D. Indeval, a depository, maintains with a foreign custodian (generally, Citibank). The Mexican broker-dealer would then notify S.D. Indeval that it has purchased the shares, and S.D. Indeval, upon receiving the notification by the custodian that the shares had been deposited, would credit the account of that broker-dealer at S.D. Indeval. The broker-dealer, after notifying the Mexican stock exchange, may sell the shares directly on the Mexican market through the IQS but only to certain entities, including various types of Mexican financial institutions and, most importantly, mutual funds.
Many limitations are placed on the scope of the IQS. Purchases of shares in the IQS are limited to financial institutions. As a result, the Mexican public will have access to such shares only indirectly, through Mexican mutual funds. A maximum of 15% of the total amount of assets of a mutual fund may be shares listed in the IQS. Furthermore, a mutual fund cannot purchase more than 10% of the same offering or series of shares, nor can the same mutual-fund operating company purchase more than 30% of the same issue or series of shares even if held by different mutual funds controlled by that operating company. Importantly, shares of foreign open ended and closed ended mutual funds may not qualify to be listed on the IQS, nor can the recently created private retirement funds hold these shares. These rules appear to reflect the view that Mexico, as a capital-importing country, should not liberalize its capital markets to afford Mexican private investors a means to easily purchase the equities of companies listed in foreign stock exchanges.
Mexico has moved boldly to liberalize its capital markets. The creation of the IQS is yet another example of this process. These changes should benefit Mexican consumers of financial services both institutional and, to a lesser extent, retail investors, by permitting them to more easily access international financial markets and in the process make Mexican markets more efficient and competitive. The next step in the process, which might occur as early as next year, would be to allow the recently created private retirement funds, so-called SIFORES, to also hold shares listed on the Mexican stock exchange through the IQS.
