Wider economic pressures in Mexico have stunted the growth of the securities lending industry. Between April to June, 2009, Mexico’s economy shrank by 10.3%.

 The outbreak of swine flu driving tourist numbers down was a contributing factor to this extreme decrease, as was the global downturn affecting demand for exports. With approximately 80% of the country’s exports sent to the US, it has been hugely affected by the fall in US consumer spending- particularly in the industrial and services sectors.

The US recession is also thought to be a huge factor in the sharp drop in the amount of money sent home by migrant workers. Mexico, which is Latin America’s second largest economy, went into recession in the first quarter of 2009, when it saw GDP drop by 8.2% compared with the same period in 2008.

On the securities lending side, albeit being slow to get underway, Mexico now has an active market. Up until 1994, the only foreign bank in operation in Mexico was Citibank, before the North American Free Trade Agreement (NAFTA) opened the securities markets to the US and Canadian firms.

 Large international banks, such as BBVA (Spain), Banco Santander (Spain), HSBC (UK) and Scotiabank (Canada) along with Citibank (US) acquired most of the largest Mexican banks and began lending.

In 1995, more foreign banks entered the market, including ABN Amro, Fuji and Societe Generale. Tokyo Commercial Bank began participating in 1997 and Deutsche Bank in 2000. Despite the industry being over a decade old, many lenders are only now establishing a presence in the country.

A move in 2005 by Banco De Mexico to open up the local markets to foreign entities and to encourage mortgage companies to start lending gave the market a boost; however this was stilted when ambiguities around tax regulations caused many of these new lenders to pull out of Mexico.

 Len Welter, chief technology officer of Data Explorers provided the graph on the next page, which represents the average of shares out on loan in relation to shares outstanding from September 2008 to August 2009. To fit the criteria for this graph, market capitalisation of the country had to be over USD100 million.

 In Mexico, this equated to 54 companies, including Telefonos de Mexico and Wal-mart de Mexico. Mr Welter, who traded securities at Morgan Stanley for ten years before joining Data Explorers last year, said: “Whilst in Mexico there is a bit of flow, in comparison with some of the western markets, it’s not big at all. This is reflected in the graph, which bounces between 40.4 and 40.5%. This is pretty indicative of not a lot of liquidity in the market”.

 Manuel Torres Barajas, the executive director of treasury and short term interest rates for BBVA Bancomer, Mexico, notes that the volume of securities lending transactions has decreased over the last two years. “At the end of last year, securities lending was affected by the global crisis, which led to a loss of participation of many market makers. Before this, the daily average was MXN50 billion, compared to MXN35 billion at which it currently stands.”

 Patrick Avitabile, managing director and global securities finance head of equity trading at Citi’s Global Transaction Services in New York, disagrees. “Within Mexico, we have seen the volumes of securities lending increasing about 25% in the last two years,” he says. “The short sells are increasing, and therefore, the market need for securities lending has grown. Offshore, we have witnessed an increase of roughly the same magnitude.

 “The increase is mainly an offshoot of additional borrowers participating in the Mexican market. We now trade with in excess of a dozen counterparties, where that number was two-to-three two years prior.”

And what about collateral? “In Mexico, eligible collateral is set out by the Mexican authorities,” says Mr Barajas. “Whilst corporate bonds are still being accepted, the global crisis has highlighted that these bonds have lower liquidity than federal bonds. Therefore, the acceptance of corporate bonds depends on their own liquidity ratios and credit worthiness.

 Typically, federal bonds have far higher levels of acceptance in regards to collateral. And in spite of the advantages of cash, for example, no haircuts or interest accrual, the current rules and regulations don’t include accepting cash as collateral” explains Mr Barajas.

 In addition, people are becoming far more cautious in terms of the types of collateral they accept. “Locally, clients lending securities are being more careful about the collateral they will accept, they usually ask for government bonds or liquid shares. For example, in the past they were more open to receive mutual fund shares,” said Mr Avitabile.