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Latin America Rates Guide 2011
Exploring Latam instruments, regulations and market conventions
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Emerging Markets Fixed Income Research March 2011
Overview Market profiles
Argentina Brazil Chile Colombia Mexico Peru Uruguay
10 16 23 29 34 41 46
Disclosure appendix Disclaimer
Emerging Markets Fixed Income Research March 2011
Foreign interest in Latin American local markets continues to grow as the
process of rating convergence and capital account opening deepens
Investing in the local markets offers interesting opportunities but involves
a set of risks and regulations that investors need to be aware of
HSBC Rates Guides are an essential information source for investors
venturing into local markets
The local markets: Risks and opportunities
Investing in the local markets could offer interesting returns, but it also involves a set of risks, conventions, and regulations not present in hard-currency bonds. These risks can be divided into two groups: economic and legal/regulatory. As the assets are denominated in local currency, the returns for foreign investors also depend on fluctuation of the value of the local currency to that of origin. The correlation between rates and FX has not been stable over time. Also, as these instruments are generally payable in the domicile of the issuer, investors are exposed to convertibility risk, which is subject to potential restrictions on repatriation of their capital. In the case of a credit event, because investments are issued under local law, investors might have to face an issuer in foreign courts, which could delay the speed and amount of any recovery.
Table 1: Types of debt and risks involved External debt Currency Payable Law Convertibility risk FX risk Credit risk Example instrument
Local currency global bonds LC USD Foreign No Yes Yes BRL Global ’28
Fixed or floating local debt LC LC Local Yes Yes Yes Brazil LTN
Inflation-linked debt Inflation units LC Local Yes Yes Yes Brazil NTN-B
Hard currency Same currency Foreign No No Yes Brazil ’34
Understanding risks and regulations involved when investing in the local markets is crucial. We regard HSBC Rates Guides as an essential tool for investors venturing into local markets. These guides provide a full description of local fixed-income instruments, a brief history of the evolution of local markets, the functioning of countries’ monetary policies, and an explanation of regulatory, settlement, and tax issues. We also recommend complementing these guides with the information contained in HSBC’s Emerging Markets Currency Guide 2011: A guiding light, 19 January 2011.
The change in Latin American sovereign balance sheets
History shows that reliance on foreign currency debt is a source of vulnerability for a sovereign that does not have the ability to print the currency it owes. While sources of foreign exchange (exports and portfolio flows) are variable and subject to shocks, debt obligations to foreigners are fixed in nominal terms, making borrowers subject to any liquidity crisis. The typical Latin American sovereign balance sheet of the ’80s and ’90s was heavy in foreign currency-denominated debt and respectively light on international reserves. The presence of foreign debt then reduced the expansionary effect of currency depreciation, and might even have turned this contractionary in cases of
Emerging Markets Fixed Income Research March 2011
Chart 2. Argentina: Public external foreign balance sheet
Chart 1. Brazil: Public external foreign balance sheet
250,000 200,000 150,000
USD mn International reserves x-gold Public and publicly guaranteed external debt
USD mn International reserves x-gold Public and publicly guaranteed external debt
100,000 80,000 60,000
50,000 87 89 91 93 95 97 99 01 03 05 07 09
20,000 87 89 91 93 95 97 99 01 03 05 07 09
Source: World Bank, BCB
Source: World Bank, BCRA
high foreign debt. This is because both fiscal and monetary policies needed to be tightened pro-cyclically whenever there was an external shock. Countries borrowed heavily in hard currency for several reasons. First, savings rates domestically were very low, and strong investment needs required foreign financing. The lack of a strong pension system did not provide a solid pool of domestic savings from which investments could be funded, while institutional fragilities led local residents to park large proportions of their savings abroad. Second, borrowing costs were perceived to be much lower in foreign than local currency, in particular at times of fixed exchange rates. Third, local currency lending, when available, was generally for short maturities. This is what economic literature calls “original sin” – the inability of countries to borrow in their own currency for long terms or in the international markets or both. Things have changed. Starting at the beginning of the 2000s, Latin American countries started to change the compositions of their balance sheets, increasing their assets and decreasing their liabilities in foreign currency. How was the “original sin” overcome? Several things happened at the same time. The adoption of a credible inflationtargeting framework allowed for issuance of inflation-linked securities. Also, inflation expectations delinked from the exchange rate, reducing volatility of local interest rates and the proliferation of floating local debt. These two, inflation linkers and floating paper, were the precursors of the local debt markets in Latin America. Key to the future development of the market was consolidation of a domestic investor base, which followed from creation of a defined-contribution pension system and an increase in the amount of local deposits due to improved regulation and supervision in the financial system. Foreign investors were attracted to local markets by strong economic growth; a reduction of macroeconomic volatility that led to achievement of investment-grade by Mexico, Brazil, and Peru (Chile was already investmentgrade); a process of interest rate convergence; currency appreciation expectations; and portfolio diversification
Chart 3. Brazil local debt composition
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Chart 4. Mexico debt composition
100% Inflation-linked 80% Floating-rate
0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Brazil National Treasury
Emerging Markets Fixed Income Research March 2011
Chart 6. Traded volume per instrument
2,500 USD mn EXD Other Local Latam Local
Chart 5 Accumulated flows since 2007
40,000 30,000 20,000 10,000 0 -10,000 -20,000 2007 2008 2009 2010 2011 USD mn T otal EM funds Local markets
2,000 1,500 1,000 500 0 1997
objectives. This not only increased the market cap of local debt, but also increased the level of foreign reserves, further contributing to the process of balance sheet strengthening.
A growing market
Investors’ appetite for local markets has been growing consistently. Attracted at times by significant carry, prospects of interest rate convergence, and currency appreciation, emerging markets’ local market funds have been set up around the world. In addition, EM local markets have attracted increasing interest from crossover funds. Chart 3 shows that local currency funds have been the main driver of increases in assets under management at EM-dedicated funds. Trading of local-market instruments now accounts for almost 70% of the volume traded in EM fixed income, up from 31% in 2000. EM countries now are forming part of the major bond indices, although their weightings are very low. For example, the EM composition of Citigroup’s World Global Bond Index (WGBI) is less than 2%, and Mexico, the only Latin American country included, represented only 0.63% by end of February 2011. Yet the share of EM in global indices continues to grow, on the back of higher ratings, deepening liquidity, and easier access for foreign investors. At the same time, several benchmarks are looking at EM local markets exclusively. The most commonly used are the JPMorgan GBI-EM Global and ELMI families, in which Latin America represents about 25 and 20%, respectively. Barclays runs an EM government inflation-linked index, in which Argentina, Brazil, Chile, Colombia, and Mexico are represented.
Chart 7. Composition of GBI-EM Global Diversified
Brazil, 10.0% Chile, 0.1% Colombia, 4.2%
Chart 8. Composition of ELMI+
Mex ico, 10.2% Colombia, 2.1% Chile, 2.0% Brazil, 2.0% Argentina, 2.0% MENA, 7.9% Peru, 1.6%
Mex ico, 10.0% EMEA, 50.9% Peru, 0.2%
EM Europe, 38.7%
Source: EPFR Source: HSBC
foreign investors have a strong presence in Latin American markets. unlevered. Foreign participation as % of local debt outstanding 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% CO CL BZ MX AR PE TK CZ HU PO CY IN VT PH TH SL TW KO SG ID MY Chart 10. now at 42% and up from zero in 2003. In the case of Brazil. 5 .Emerging Markets Fixed Income Research March 2011 abc Foreign participation varies by market Participation of foreign investors in Latin American local markets has been growing steadily. Mexico foreign participation 25% 20% 15% 10% 5% 0% 1999 Source: Banxico % of Total amount outstanding 2001 2003 2005 2007 2009 2011 Source: Respective central banks ______________________________________ 1 International Monetary Fund (2010): Resolving the Crisis Legacy and Meeting New Challenges to Financial Stability. April 2010. where some countries show very little participation. up from 5% three years ago. institutional investors of domestic securities could translate into a USD45bn reallocation to EM securities annually. In Peru. slightly less on average than in the biggest EMEA markets but more than in Asia. participation is close to 10%. Foreign investor participation in the Colombian local fixed-income market remains significantly lower than in regional peers. Chart 10 shows that this escalated in the case of Mexico over the course of 2010 because of that country’s inclusion in the WGBI index. Chart 9. participation is the highest in the region. This suggests that further rating convergence will allow for the inclusion of other countries into global indices and “force” higher allocations to EM in general and to the region in particular. Relatively. Global Financial Stability report. or approximately two-thirds of the flows to emerging markets in 20091. An International Monetary Fund study estimated that each 1% shift in the holdings of US-based.
but with special reserve N/A Uruguay Yes Yes N/A N/A Emerging Markets Fixed Income Research March 2011 CB bills. NTNFs BRL1. TCO. FOGAFIN TES.0 USD1.5m 8bp VACs PEN2.5bn USD50-100m 1-3bp Bid/offer spreads under normal conditions 25-50bp Instrument #2 Daily turnover Buying volume in a single day Bid/offer spreads under normal conditions Source: HSBC Bonds USD300m Depending on tenor.5bn USD50-100m 1-3bp depending on maturity NTNBs. Títulos de Deuda Externa. corporates. Bonos para la seguridad. bank bonds Yes Yes.5m USD0.6 Table A: Region at a glance: Bond market technicals and liquidity Argentina Available repo facilities Onshore with central bank Onshore interbank Offshore investors with onshore Onshore nonbank investor (eg custodian) with onshore Eligible collateral for repos For CB repos Yes Yes No Yes Brazil Yes Yes No No Chile Yes Yes No No Colombia Yes Yes N/A N/A Mexico Yes Yes No Yes Peru Yes Yes Yes. liquid tenors USD30m 5bp for liquid tenors TES Bonds COP6. corp bonds. CB notes and bonds CB bills. repo. treasury. except LT hedging Yes Yes TES.0trn COP200bn 2.0 50bp abc . TRDs.5bp MBonos MXN15bn MXN50M 3bp Udibonos MXN5bn MXN30m 3-5bp Soberanos PEN140m USD50. CB notes and bonds Yes Yes N/A Yes Local sovereign bonds Central bank bonds For interbank repos Mark-to-market requirements Banks Insurance companies Pension funds Mutual funds Offshore investor access Direct purchase Subject to cap Registration requirement Access to onshore funding Access to onshore FX hedging Access to rates hedging (IRS.6bn USD1. TDAs. corporate bonds Yes Yes Yes Yes No T-bills No T-bills Yes N/A N/A Yes Internal requirements Internal requirements Yes Yes Yes Yes Yes Yes Yes No No Yes Yes Yes Only through banks Yes Yes No Yes Yes Through banks or stockbrokers No Yes No Yes IRS No Yes Yes No Yes Yes Yes Yes. with a local custodian and central bank account Yes No Yes Yes No No Yes Yes Yes Yes No Yes Yes (interest rate swap) Treasury bonds ARS1.0m LTNs BRL6. FOGAFIN Yes Yes Yes Yes Federal government bonds Commercial paper. TCO. futures) Market liquidity statistics Instrument #1 Daily turnover Buying volume in a single day Local sovereign bonds CB.9m 20bp Bonds USD10.
1trn Dutch CLP20.000 From 6 months to 14 years Fixed Anual Bullet NL/365 COP98. and foreign investors None Local custodian required. 2/month (NTNF) Brokers and banks T+1 6% Semiannual Bullet Actual/360 CLP 1. T+1. local Banks. insurance companies.5% No No No No abc No No 7 . local banks. Banks. and mutual funds Dutch Exchange or OTC 9. local banks companies.0bn COP5.00-17.3bn for NTN-F Usually T+3 T+0 Caja de Valores/Euroclear Selic Local and foreign banks.55trn Single rate MXN4. and foreign investors Mexico Bonos M United Mexican States (UMS) Mexican pesos (MXN) Scripless MXN100 3. T+1.0m Monthly Banks. stockbrokers Weekly (different tenors each Monthly week) Banks.Table B. market makers Foreign accounts through local Banks.1m) UYU5m (USD260k) T+0. 10. individuals. Region at a glance: Government bonds Argentina ARS. 4bn (NTN-F) Weekly (LTN). 5.0m BRL10m USD40m BRL 3bn for LTN. 1. and foreign investors OTC (MAE)/MERVAL OTC/BM&F 9am-4pm 9am-6pm Dirty price to 2 decimal places Yield up to 2 (sometimes 3) decimal places 25-50bp 1-3bp ARS5. T+2 DCV Pension funds. No if not 0. insurance foreigners. final custody on BCU No 1-10 years (NTN-F) – 1-2 years 5. and brokerage houses T+0 SEN/MEC/OTC 8. banks.2trn Dutch COP500bn Biweekly Pension funds. local banks. individuals. brokerage houses.30-13. mutual funds. and corporations Regulations for foreign investors Restriction on foreign investment Custodian Interest income tax Capital gains tax Entry/exit Source: HSBC Need to open local custody with Need to open a trading account Not restricted FX restriction: 30% deposit in a CB registration required tax ID with an appointed administrator central bank account at 0% interest for one year Local custodian required Local custodian required (Selic) Local custodian required Local or Euroclear No No No Exempt Only if holding is less than 30 days IOF and CPMF Capital gains (CG) and Yes withholding (WHT) tax 35%.to 10-years (LTN) Fixed (NTN-F) – Zero (LTN) Semiannual (NTN-F) – zero (LTN) Bullet Business days/252 BRL534bn Yankee Per month: BRL15bn (LTN).00 Yield up to two decimal places 5bp//5pips UYU20m (USD1. pension funds.0m Colombia TES Finance ministry Colombian peso (COP) Scripless COP500.00 Yield up to 2 decimal places 2bp COP5. insurance companies. local funds.00-16. foreign real money funds and hedge funds. and 30 years Fixed-rate Semiannual Bullet Actual/360 MXN1.000 Chile BTP National treasury Chilean peso (CLP) Scripless CLP5. Datatec 10am to 1pm local time Yield up to 2 decimal places 8-10pips PEN15m PEN150m T+1 CAVALI Banks. AFPs. 20. Local asset managers.0trn T+0 SEBRA/DECEVAL Pension funds.5bn weekly Peru Soberanos Finance ministry Peruvian Sol (PEN) Scripless PEN10 From 1y to 31 years Fixed Semiannual Bullet 30/360 PEN26bn Dutch Uruguay Notas del Tesoro in UYU Finance ministry UYU Scripless UYU1 3-8years Coupon Semiannual Bullet 360 UYU11bn No schedule N/A N/A N/A N/A OTC/BVM/BEVSA 10.30 Yield Semi Act/365 5bp CLP1bn CLP 20bn T+0. T+2 BEVSA/BVM/BCU Pension funds. foreign investors. T+2 T+1 OTC 7am to 2pm Yield up to 2 decimal places 2-4bp MXN50m MXN7-11bn Usually T+2 Local/Euroclear Local banks and funds. brokerage houses. insurance companies.and CPI-linked Issuer Currency Form Minimum denomination Tenors Coupon/discount Frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Issuance cycle Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Economy ministry Argentine peso (ARS) Physical ARS1 1 to 30 years Fixed Ad-hoc See text 30/360* USD44bn No schedule N/A N/A N/A N/A Emerging Markets Fixed Income Research March 2011 Brazil (NTN-F and LTN) National treasury Brazilian real (BRL) Scripless BRL1. bonds issued from 2010 Yes 0% 4% of the interest received No None Local custodian required Exempted when tax treaty exist.
25 6. We use consistent bootstrapping and interpolation methodology to derive all curves.28 5.07 6. We consider the report a useful tool in generating trade ideas in local markets. implied changes.53 4. implied change change (bp) (bp) 3 11 17 8 14 25 21 14 14 8 23 18 17 17 15 14 3 14 30 39 53 78 99 113 126 134 157 175 192 209 224 239 8 .95 5. South Africa. ie we compute a strip of forward-starting short rates with start date on effective date following each future central bank meeting. ie the next 24 months. Czech Republic. Hungary.94 5. Mexico. Initially.64 4.76 5.80 4.71 3.98 6. it has implied probabilities for a set of cumulative implied changes per meeting. Market-implied future central bank rates are computed from implied forward rates.63 5. accommodating specific market conventions and using the mostliquid instruments for each market.22 13. It uses closing Asia prices. Forward rates are derived from local interest rate curves where available (and cross-currency swaps in a few cases). Taiwan.89 5. It provides the market-implied path of monetary policy rates for key EM countries globally.98 12. Our approach yields a meeting-by-meeting path of implied rate moves. and last close New York. cumulative implied changes Brazil Meeting 20-Apr-11 8-Jun-11 20-Jul-11 31-Aug-11 19-Oct-11 30-Nov-11 19-Jan-12 1-Mar-12 12-Apr-12 31-May-12 12-Jul-12 30-Aug-12 11-Oct-12 29-Nov-12 17-Jan-13 28-Feb-13 Source: HSBC Implied Implied Cum.74 6. India. The following table provides a glimpse of our Monitor for Latin America.84 6.89 Implied Cum. Korea.40 12.07 12. Chile. we are covering Brazil. Poland.59 12.09 13.49 5. Thailand. This report is available as a download from Bloomberg (HSBCnet on Bloomberg: HSER <GO>) and the HSBC Global Research Web site at about 11am London time daily.42 6. implied rate change change (%) (bp) (bp) 3.41 4.02 5.81 12.59 6.69 5.Emerging Markets Fixed Income Research March 2011 abc Emerging Market Central Bank Monitor Market-implied path of monetary policy rates for key EM countries An important tool to assess investment opportunities in local markets is HSBC’s EM Market Central Bank Monitor.8 4.16 13.82 5.01 21 9 32 29 41 20 33 13 12 9 12 9 4 1 2 3 21 30 61 91 132 152 185 198 210 219 231 240 244 245 248 251 Mexico Meeting 15-Apr-11 27-May-11 8-Jul-11 26-Aug-11 14-Oct-11 2-Dec-11 20-Jan-12 2-Mar-12 15-Apr-12 4-May-12 6-Jul-12 24-Aug-12 12-Oct-12 30-Nov-12 11-Jan-13 22-Feb-13 Implied rate (%) 4.9 5. Israel. We compute probabilities of a given move and provide a history of implied policy moves (see the table at the bottom of this page). Malaysia. implied rate change change (%) (bp) (bp) 12.48 5.22 13.11 4.13 13. The horizon covers the “monetary policy segment” of the yield curve.35 5.21 13.03 5.97 13. rather than cumulative implied moves over a specific time horizon (eg “hikes over the next three months”).85 65 19 22 16 12 7 5 2 0 -2 -3 -5 -7 -9 -13 0 65 84 106 122 134 141 145 147 147 146 143 138 132 123 110 110 Chile Meeting 17-Mar-11 12-Apr-11 12-May-11 13-Jun-11 13-Jul-11 16-Aug-11 16-Sep-11 17-Oct-11 17-Nov-11 19-Dec-11 19-Jan-12 20-Feb-12 20-Mar-12 20-Apr-12 21-May-12 21-Jun-12 Implied Implied Cum.81 5. In addition.85 12.6 5.20 13.18 13. and Turkey. Latin America: Implied rates. opening London prices.
Emerging Markets Fixed Income Research March 2011 abc Market profiles 9 .
0 5. By market debt. 70%.7 1% 24% 28% ARS Badlar-linked USD Bodens Source: Mecon 2. Following the nationalization of the private pension fund system in October 2008. Of this group.4 0. We estimate that bonds held by private sector investors account for only 18% of GDP.5% under foreign law.Emerging Markets Argentina March 2011 abc Argentina Argentina’s public debt in the hands of private investors accounts for only 18% of GDP. Chart 11. 28% inflation-linked (CER index). according to our estimates Even though activity in CER-linked paper has been picking up. the public sector ended up being the main holder of Argentine sovereign debt. Multilateral and bilateral debt (excluding Paris Club) accounts for 10% and temporary advances to the treasury from the central bank represents 6% of the total debt. In this local market guide. foreign investors are mostly involved with the USD-denominated segment of the market Argentina has not issued for cash in international debt markets since 2001 Market structure Official data as of September 2010 indicate that total public debt – excluding bonds that were not presented in the 2005 and 2010 sovereign restructurings of defaulted debt – amounted to USD160.5% was under Argentine law and 32.9bn.4 4. Argentine local debt composition (excluding restructured debt) Chart 12. 47% is denominated in USD (Bodens and Bonars). 25% floating interest rate Badlar-linked paper. excluding restructured bonds. and only 1% in nominal ARS (see Chart 11). we mean bonds either in private or public hands that can be traded in the secondary market and that are accessible to foreign investors. we focus on market debt issued under Argentine legislation.8 1. Total public debt is mainly composed of bonds. of which 27ppt is ARS-denominated and 43ppt hard currency-denominated. 67.5 Boden 2013 Bonar V Boden 2015 Bonar X ARS Nominal USD Bonars ARS CER-linked Boden 2012 Bonar V Source: Mecon 10 . Of this debt. USD-denominated bonds issued under local legislation – USDbn (excluding restructured debt) 22% 25% 6.
we see increasing prospects that the government may attempt to issue new debt for cash next year. Central bank bills and notes – Lebacs and Nobacs – are issued on a weekly basis to control high-power monetary aggregates. Monetary policy The BCRA does not pursue an explicit inflation target. the government has issued an IOU to the bank for USD6. and questions about the accuracy of inflation calculation.6bn. Lacking access to foreign debt markets.5%. The three. the nationalization of the local pension-fund system in 2008. CB notes and bonds For interbank repos CB bills. repo. For this.4 Buying volume in a single day (USDm) with 1. the BCRA targets the quantity of money supply based on quarterly objectives for M2. Key policy rates Reverse repo rates (pases pasivos) of three and seven days are set by the central bank as one of the tools to manage the monetary base and comply with the monetary program.0 minimal market impact Bid/offer spreads under normal conditions (bp) 25-50 Source: HSBC Recent developments The Argentine bond market has been dominated by three events: the 2001 debt default (and the subsequent debt exchanges of 2005 and 2010). although its charter indicates the ultimate goal of the institution is to preserve the value of the ARS.and seven-day reverse repo rates are currently set at 9. The difference between the price at which the central bank sells and buys the bonds is the rate that financial institutions get for the repo. respectively. The central bank also uses repos and reverse repos with private and public banks to contract or expand the monetary base. the government has resorted to service external debt owed to multilateral and private creditors with foreign reserves from the Banco Central de la República Argentina (BCRA). and the others had a strong impact on the liquidity of local debt and the process of de-dollarization of liabilities. A reverse repo consists of the temporary sale of government paper to control the quantity of money.6bn in 2010. CB notes and bonds Mark-to-market requirements Banks Yes Insurance companies Yes Pension funds N/A Mutual funds Yes Taxation: Government bonds Onshore investors No Offshore investors No Offshore investors’ access Foreign ownership of government bonds As % of outstanding N/A Direct purchase Yes Subject to cap No Registration requirement No Access to onshore funding Yes Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps. futures) Yes Market liquidity statistics Daily turnover (ARSbn) 1. While access to voluntary capital markets abroad remains constrained by potential attachment due to lawsuits of holders of defaulted debt.0% and 9. The first event constrained the government’s access to international capital markets. 11 .Emerging Markets Argentina March 2011 abc Table 2:. and repeated that this year for USD9. Financing costs have dropped from almost 16% in mid-2010 to a current Boden’15 yield of close to 9%. For this.Argentina: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Yes Onshore interbank Yes Offshore investors with onshore No Onshore nonbank investor (eg custodian) with onshore Yes Eligible collateral for repos For CB repos CB bills.
the government stopped issuing Bonars. paid on a semiannual basis. Also ARS-denominated Quasi-Pars were issued for local pension funds only. Bonar V. Since then. failed to become the benchmark on the belly of the curve. and Global ’17s – all instruments are quoted on a dirty.and USD-denominated paper. Still. respectively. 12 .5bn. the government has not issued for cash in the international bond markets due to risks of attachment by holders of defaulted debt.3bn. price basis. and X Amounts outstanding: USD1. respectively. Investors also received one unit of USD or ARS GDP warrants (see below) per unit of tendered debt (see below). or all-in. and 17 April 2017. Amortization: Bullet. Discounts. A second tranche of the exchange was reopened in 2010 under similar conditions.0bn. Boden 2012 Amount outstanding: USD4. Coupon: 7% fixed. Considering the restrictions regarding access to international debt markets. and central bank paper. VII. and USD6. 12 September 2013. Yet domestic investors. The index shows the daily evolution of consumer prices calculated as a geometric mean using as input the monthly CPI as reported by the national statistics agency INDEC. with exception of bonds issued under the sovereign restructuring – Pars. given its thin liquidity.Emerging Markets Argentina March 2011 abc HSBC provides indicative prices for Argentine domestic government debt securities via Bloomberg page HSAR. Foreign investors are mostly active in USDdenominated Boden 2015. but higher coupon). Argentina has exchanged 92% of its defaulted bonds for new. about US4bn of defaulted debt has not been tendered. ARS CER-linked paper The CER (coeficiente de estabilización de referencia) is an index produced by the BCRA. The range includes both ARS. the government accessed foreign investors via the issuance of Bonars. Amortization: Annual installment of 12.and ARS-denominated Pars (no face value haircuts. Coupon: Six-month Libor rate. mainly local banks. and investors also received Global ’17s as a compensation for past-due interest. Chart 13. In terms of trade quoting. The new Global 2017. Maturity: 3 August 2012. current bonds through two exchanges in 2005 and 2010. Yet since early 2007. These local-law bonds were denominated in both ARS and USD. USD-denominated local debt Interest Local fixed income instruments Argentina defaulted on its bonded external and domestic debt at the end of 2001. are active in this type of instruments. Following the nationalization of the pension fund system. Until now. the government exchanged defaulted debt in multiple currencies for USD. the social security agency Anses became a key player in the local market. Maturity: 28 March 2011. but very low coupon) and Discounts (67% face value haircut. by the time market participants started to question the accuracy of the consumer price index reading. Inflation-linked and Badlar-linked paper is usually much less liquid than USD-denominated local bonds. Debt profile of public bonds USDbn 16 14 12 10 8 6 4 2 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Amortizations Source: Mecon Bonds The Argentine local debt market includes a variety of different types of instruments. USD2.5% of face value. paid on semiannual basis. inflation and Badlar-linked treasury debt. which was issued after the reopening of the exchange in June 2010. In 2005.85bn.
Boden 14 Amount outstanding: ARS7.36bn.Emerging Markets Argentina March 2011 abc Badlar-linked instruments Bogar 18 Amount outstanding: ARS13. Interest was capitalized up to 15 March 2008. Interest was capitalized until 3 January 2006.04% of the CERadjusted capital. Maturity: 10 September 2015. 3) Accumulated past payments should not exceed 0.5m. Coupon: 2% annual rate.70%) of the issued amount.6bn. starting on 4 March 2005. Bocan 2015 Amount outstanding: ARS10. quarterly payments starting 10 December 2010.98%.14% of the CERadjusted capital. Maturity: 30 January 2014. The first payment took place on 3 February 2006. Coupon: 2% annual rate. based on CER-adjusted capital (30/360). Amortization: Bullet. starting on 3 February 2006.44bn. Coupon: 2% annual rate. The Badlar (private banks) rate is the average rate among private banks for 30.48 per notional unit. quarterly payments starting 30 April 2009. including capitalized interest up to 3 January 2006.to 35-day certificates of deposit of ARS1. starting on 15 April 2008. based on the notional amount of the warrant. Amount outstanding: ARS6. paid on a monthly basis. Maturity: 15 December 2035 or earlier. ARS-USD warrants Issue date: 31 December 2003.60%. The coupon rate from issue to 30 January 2010 is 15. Maturity: 30 September 2014. The payment will take place on 15 December of the following relevant reference year if the following three conditions are met: 1) The level of real GDP has to exceed the base-case GDP. Amortization: Six semiannual installments (five of 16. based on CER-adjusted capital (ISMA-30/360). Guaranty: Federal taxes under the tax-sharing program with provinces. based on CER-adjusted capital (ACT/365). Bocon PR12 Amount outstanding: ARS1.84% and one final monthly installment of 0. The first payment took place on 4 October 2002. based on CER-adjusted capital (30/360). 47 monthly installments of 0.5% of CER-adjusted capital. Coupon: 2% annual rate. Amortization: 119 monthly installments of 0. paid on a semiannual basis. including capitalized interest up to 15 March 2008. paid on a monthly basis. The payment amount corresponds to 5% of the 13 . paid on a monthly basis. 2) Real GDP growth has to exceed the growth rate corresponding to the base-case GDP. Maturity: 15 March 2014. Bocan 2014 Bocan paper was issued in an exchange of guaranteed loans (préstamos garantizados nacionales).375% of CERadjusted capital. starting on 31 March 2011. Bocon PRE9 Amount outstanding: ARS293. Coupon: Badlar private banks rate +300bp (ACT/365). starting on 10 March 2013. The Badlar private banks rate is calculated as a simple average of the daily reported rate by the central bank from 10 days before the beginning of the coupon to 10 days before the payment of each coupon (same for Bocan 2015).84bn. GDP warrants Even though formally the GDP warrants are not considered a pure fixed-income instrument. foreign investors trade this paper as part of their bond portfolio.4%. The central bank publishes this on a daily basis. including capitalized interest up to 4 September 2002. Amortization: 70 monthly installments of 1. Amortization: Eight semiannual installments of 12. Interest was capitalized until 4 September 2002. Coupon: Badlar private banks rate +275bp.0m or higher.35% and two final monthly installments of 1.66% and a last one of 16. Maturity: 4 February 2018. Amortization: 60 monthly installments of 0.64bn. and a last installment of 1.40%. 48 monthly installments of 0. Maturity: 3 January 2016. The first payment took place on 15 April 2008. Coupon: Paid annually. The base case was established by the government at the time of issuance and determines a specific real GDP growth-rate path.
ar National Bureau of Statistics (INDEC) www. settlement. Table 4. ie ARS-Discounts. please see HSBC’s Emerging Markets Currency Guide 2011: A guiding light.ar Buenos Aires stock exchange www. Most active players in this market are local banks.gov.001 USD300m ARS0. difference between actual real GDP measured in ARS and the base-case GDP. Taxation Taxes in the form of VAT. Maturities are due in March.5 years and shorter.bolsar. is cleared both locally and via Euroclear and Clearstream.ar HSBC Argentina Bloomberg page HSAR <GO> Source: HSBC 14 . for investors to require the change to Euroclear custodian.ar Electronic open market (MAE) www.The implied exchange rate.0025 6-month 2 vols (USD 20m) Useful links Table 5. are quoted in both USD and ARS and can be traded both domestically and offshore.ar Ministry of Economy (MECON) www. and December with tenors ranging from six months to two years.com.com Argentina Securities and Exchange Commission (CNV) www. investors are exposed to the BCS and not the official spot exchange rate. Caja de Valores. Most fixed income instruments. Foreign exchange For details on FX markets. Regulation has become tighter to limit this type of operation.gov.indec. An alternative vehicle used by investors consists of the following operation.boletinoficial. a minimum of six working days is necessary for the bonds to be under a Euroclear custodian. with an average ticket of ARS10m.gov. is called the blue-chip swap (BCS). As the usual settlement of Argentine bonds is T+3. Yet most liquid contracts are 1.ar Official gazette www.0m ARS0. Normal market conditions Onshore average daily volume Onshore spot transaction Onshore bid/ask spread Onshore forward transaction Onshore forward spread Offshore average daily volume Offshore bid/ask spread Implied option volatility spread Source: HSBC Regulatory. The operation in which an investor buys a bond in USD offshore and sells it in ARS in the domestic market – or vice versa – results in inflows of ARS (outflows of USD). For example. When engaging in this type of operation. June. Foreign investors bringing foreign exchange at the spot exchange rate into the Argentine capital markets are required to make a 30% deposit at zero interest rate in a central bank account for a one-year period. Information sources Central Bank of Argentina www.gov. capital gains. Derivatives The onshore interest fixed rate swap (IRS) market is limited to Badlar versus fixed rate.mecon. or income tax do not apply to transactions in Argentine fixed income instruments. the ratio of the USD to ARS price of the selected instrument.gov.bcra. all Argentine paper.0025 USD100m ARS0.Emerging Markets Argentina March 2011 abc Settlement With the exception of internal central bank bills and notes. and tax issues Regulation Free capital movement is restricted by regulation. USD600m USD5. there is a minimum required period of 72 hours after settlement in the local custodian. September.mae. either local or external. 19 January 2011.cnv.
0bn Usually Tuesdays Local banks. insurance companies.8bn Dutch (one price) ARS1. insurance companies.0bn Usually Tuesdays Local banks.3bn Dutch (one price) ARS1. and corporations FX restriction: 30% deposit in a central bank account at 0% interest for one year Local custodian required No No No Central bank bills (Lebacs) Argentine central bank Argentine peso (ARS) Physical ARS1 Up to one year Zero Zero Bullet Actual/365 ARS47. individuals.Emerging Markets Argentina March 2011 abc Table 6. to hold central bank paper. individuals.and CPI-linked) Economy ministry Argentine peso (ARS). foreign investors.0m USD40m Usually T+3 Caja de Valores/Euroclear Local and foreign banks. insurance companies. insurance companies. and mutual funds T+1 OTC (MAE)/Merval 9am-4pm Dirty price to 2 decimal places 1-5bp ARS10m USD160m T+1 Caja de Valores Local banks. insurance companies. insurance companies. Argentina: Bonds Treasury bonds (USD) Issuer Currency Form Minimum denomination Tenors Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Economy ministry US dollar (USD) Physical USD1 1 to 30 years Fixed/floating Semiannual See text 30/360 USD69. Local custodian required No No No Local custodian required No No No 15 . and corporations Treasury bonds (ARS. foreign investors.0m USD40m Usually T+3 Caja de Valores/Euroclear Local and foreign banks. US dollar (USD) Physical ARS1 1 to 30 years Fixed Ad hoc See text 30/360* USD44bn No schedule N/A N/A N/A N/A OTC (MAE)/Merval 9am-4pm Dirty price to 2 decimal places 25-50bp ARS5. and mutual funds T+1 OTC (MAE)/Merval 9am-4pm Dirty price to 2 decimal places 1-5bp ARS10m USD160m T+1 Caja de Valores Local banks. and mutual funds Central bank notes (Nobacs) Argentine central bank Argentine peso (ARS) Physical ARS1 Up to 3 years Badlar + 250bp Quarterly Bullet Actual/actual ARS25.4bn No schedule N/A N/A N/A N/A OTC (MAE)/Merval 9am-4pm Clean price to 2 decimal places 25-50bp USD3. and mutual funds Regulations for foreign investors Restriction on foreign investment FX restriction: 30% deposit in a central bank account at 0% interest for one year Custodian No Interest income tax No Capital gains tax No Entry/exit No * 30/360 in most cases Source: HSBC Foreign investors are not allowed Foreign investors are not allowed to hold central bank paper.
this is a well-developed and deep market with some idiosyncrasies Local bonds and CDI swaps are the most relevant instruments for foreigner investors Recent developments. As of November 2010.Emerging Markets Brazil March 2011 abc Brazil Brazil has the largest local market in Latam by market capitalization. not least because its local market provides some of the highest real yields available in fixed income. DI futures are among the most actively traded instruments in the local curve. This duration Chart 15. and foreign investors can access them through offshore CDI swaps. Fixed rate debt increased from less than 10% to more than 37% over the same period. but Brazil still offers some of the highest real yields in EM Market structure Brazil continues to attract significant interest from international investors. The main yield curves used in Brazil are derived from the futures markets. HSBC 16 . At the same time. the local government bond market had about USD930bn in notional held by the public – the central bank is holding an additional USD420bn in domestic government debt – and this was Chart 14. Over the past 10 years. In November 2010. Brazil’s fixed income market is comparatively deep and well-developed in terms of available instruments and liquidity. About USD7bn of Global BRL bonds are outstanding. but its share has declined sharply over the years from more than 60% 10 years ago. which provide investors that have no access to local debt instruments in Brazil with exposure to Brazilian local yields. with its share rising from less than 6% in 2000 to 28% now. mainly the IOF tax. Brazil’s local government debt profile has changed significantly (see Chart 14). Local debt composition (by notional held by public) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: National Treasury Brazil more than 20 times larger than the external debt market of approximately USD42bn. have tempered investors’ appetite for Brazilian local debt. Floating rate debt still plays a large role. from a share of more than 20% of nominal debt held by the public in 2000. at 34%. Brazil had nearly eliminated USDlinked local debt. rather than the government bond market. Inflation-linked debt also has taken on a much stronger role in Brazil’s debt management strategy. Government bonds maturity profile FX-Exchange +10yr up to 1yr Floating rate 5-10yr Inflation Linked 3-5yr Fixed rate 1-3yr Source: National Treasury Brazil.
0bn. compared to the peer group in Latam (with the exception of Colombia). As of January 2011. Pension fund regulation was altered in 2009 by raising state and municipal pension funds’ minimum allocation in fixed rate funds to 70%. the BCB releases the meeting minutes. Nonetheless.5% to 15% depending on holding period Offshore investors Exempt from capital gains unless from tax haven. the share is low overall. The Copom is composed of the members of the BCB board of directors: the central bank governor and the deputy governors of monetary policy. However. there is still a long way to go. as more than 60% of Brazil’s local debt is in maturity buckets of less than three years (see Chart 15). special studies. The inflation target is currently 4. repo. This measure has significantly reduced foreign inflows into the domestic market.8bn. economic policy. currently eight times per year. and measured relative to the IPCA inflation index. a bias to ease or tighten authorizes the BCB governor to alter the Selic interest rate target in the direction of the bias anytime between regular Copom meetings. NTNFs 1. was raised to 6% from 2% in October 2010 (equity investment still incurs the 2% levy). The effective Selic rate is an average of all rates traded during the day. foreign domestic debt participation stood at 12%.Emerging Markets Brazil March 2011 abc Table 7. Nonetheless. NTNBs 1. This rate is annualized using 252 business days (exponentially compounded) and can be tracked through Bloomberg ticker BZSELICA.5%. To that effect. The BCB governor holds the deciding vote whenever there is a split decision on monetary policy. 17 . Copom meets on scheduled dates. Eight days following each Copom meeting. an upfront entry tax on foreigners’ investments in fixed-income securities. is responsible for monetary policy and for setting the short-term interest rate. with a 2% tolerance interval on either side of the target.3bn 50-100 1-3 depending on maturity The Copom also can establish a monetary policy bias at its regular meetings. the monetary policy committee. Recent developments The IOF tax.5bn BRL: LTNs 3. The BCB regulates liquidity in the financial system by conducting daily open-market operations. They need to adjust to the new parameters by June 2011. Monetary policy The Banco Central do Brasil (BCB) conducts an inflation-targeting regime. Domestic debt financing strategy continues to target an increase of the share of fixed-rate and inflationlinked bonds. to determine the target for the interest rate for overnight interbank loans collateralized by government bonds registered with and traded on the Sistema Especial de Liquidação e Custódia (Selic). financial system regulation. bank privatization and administration. international affairs. Brazil: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Yes Onshore interbank Yes Offshore investors with onshore No Onshore nonbank investor (eg custodian) w/ onshore No Eligible collateral for repos For CB repos Local sovereign bonds For interbank repos Local sovereign bonds Mark-to-market requirements Banks Yes Insurance companies N/A Pension funds N/A Mutual funds Yes Taxation: Government bonds Onshore investors Capital gain tax bracket from 22. 6. with an implicit gradual increase of the duration of federal debt outstanding. financial supervision. futures) Yes Market liquidity statistics Daily turnover Buying volume in a single day (USDm) with minimal market impact Bid/offer spreads under normal conditions (bp) Source: HSBC extension of Brazil’s domestic debt stock has helped reduce local market volatility and made debt service more predictable. the average number understates the concentration of foreign ownership in certain fixed-rate and inflation-linked bonds. Copom. 6% IOF upfront Offshore investors’ access Foreign ownership of government bonds Yes As % of outstanding c12% Direct purchase Only through banks Subject to cap Yes Registration requirement Yes Access to inshore funding No Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps.
BRL fixed rate debt securities The government debt security with the greatest volume outstanding is the financial treasury bill LFT. National treasury is currently holding weekly formal auctions for LTNs. Amortization: Bullet at maturity. HSBC provides executable prices for Brazilian domestic government debt securities via Bloomberg page HSBS. indexed to the IGP-M inflation index. Daily secondary-market trading volume for specific securities is published weekly in the Open Market Report published by the BCB. Volume outstanding (January 2011): BRL64bn. Amortization: Bullet at maturity. indexed to the IPCA inflation index.or floating-rate coupons. and there are no plans to resume issuance. Interest: Floating. Tenor: Variable tenors. LFTs bear floating-rate interest based on the Selic interest rate. Amortization: Bullet at maturity. USD-linked fixed-rate debt security LTN (national treasury bills): This is currently the security with the greatest secondary-market liquidity. National treasury is currently holding weekly formal auctions for LFTs. Coupon: Semiannual. Coupon: Zero coupon. Interest: Floating. subject to market conditions. Domestic government debt securities today are mainly denominated in BRL and bear fixed. Currently. the most relevant of which recently was the D-series national treasury note (NTN-D). Volume outstanding (January 2011): BRL236bn. The C-series national treasury note (NTN-C) is indexed to the IGP-M inflation index. Coupon: Semiannual.Emerging Markets Brazil March 2011 abc BRL Selic-indexed floating-rate debt securities Local fixed income instruments Bonds Federal government debt is issued by the treasury. BRL inflation-linked floating rate debt securities National treasury has two types of BRL inflation-linked debt securities. NTN-F (national treasury note): Interest: Fixed. subject to market conditions. the benchmark rate in the fixed income market. Amortization: Bullet at maturity. there is a large portion of inflation-linked debt. which manages both external and domestic debt. Volume outstanding (January 2011): BRL382bn. NTN-Ds are settled in BRL and the USD/BRL fixing rate is the PTAX of the business day immediately before the maturity or interest coupon date. Interest: Floating. Currently NTN-Cs are not issued any longer. Tenor: Generally between six months and two years. 18 . Volume outstanding (January 2011): BRL291bn. Coupon: Semiannual. currently between two and 40 years. subject to market conditions. Tenor: Generally between five and 10 years. National treasury can also issue USD-linked. and is the most actively traded. by means of auctions or repurchase agreements. Volume outstanding (January 2011): BRL530bn. inflation-linked government debt security. The National Association of Financial Market Institutions (Andima) posts secondary market prices for the main federal domestic securities collected from the most active market participants. fixed-rate domestic securities. Tenor: Long term. Additionally. no NTN-Ds are outstanding. indexed to the Selic interest rate. subject to market conditions. Interest: Fixed. The BCB may intervene in the government debt securities secondary market for monetary or foreign exchange policy purposes. B-series national treasury note (NTN-B) is indexed to the IPCA inflation index. Tenor: Originally long term. generally five years. Coupon: Zero coupon. the yardstick for the inflationtargeting regime. Amortization: Bullet at maturity.
The floating rate depends on the daily evolution of the CDI.5% (2016 and 2022). with an open position of more than 10m contracts as of March 2011. the contract is settled as daily settlement amount S as follows (in BRL): where SP is the settlement price of the contract and DI is the CETIP-DI rate corresponding to the business day preceding the settlement.Emerging Markets Brazil March 2011 abc On the trade date.000 i 1 + 100 BD 252 where i = the traded interest rate of the contract. Liquidity in CDI swaps is largest for the most actively traded DI futures contracts. in terms of tenors. but liquidity is concentrated up to two years and then falls gradually. The domestic BRL yield curve is predominantly derived from the DI futures contracts. For offshore CDI swaps. Interest rate swaps The most common interest rate swap in Brazil is the CDI swap. which currently varies between 3-25bp depending on tenor but can change depending on market conditions. the P/L is settled at maturity in BRL. The bulk of the liquidity is in January futures. instead of from the government bond market or swap curves as usual. currently 10. Hence. BD = the number of business days between trade day and the day before the expiration date of the contract. P0 = 100. Tenor: Long-term. DI futures contracts are an effective indicator of the market outlook for the results of coming Copom meetings. Note that there is an onshore/offshore spread for CDI swaps traded offshore. The CDI accrual factor between any two dates is published on the CETIP website. Liquidity is significant.25% (BRL Global 2028) and 12. July. 19 . Contract size is BRL 100. the trading price P per contract is calculated as follows (in BRL): Global BRL bonds Though global BRL-denominated bonds are legally external debt. Given that the nature of the DI-CETIP interest rate is almost identical to that of the Selic rate. Amortization: Bullet at maturity. Each contract stops trading on the last business day of the month proceeding the contract month and settles on the second business day following the last trading day. Derivatives The main yield curves used in Brazil are derived from the futures markets. In the onshore market.3bn. Both swap legs are denominated in BRL. DI futures The accumulated DI-CETIP overnight interbank interest rate is the underlying asset for the DI futures traded on the BM&F Bovespa exchange. current maturities between 2016 and 2028 outstanding. treasury plans to issue more. On any DI St = SP t − SP t −1 ×1 + t −1 100 1 252 given day after the trade date. followed by the July futures. they have become popular with international investors. The fixed leg is a predetermined interest rate. Settlement: Settled in USD according to PTAX rate two business days prior. and October). because these provide exposure to local rates without being subject to access constraints and taxes associated with domestic debt instruments. which is exponentially compounded on a daily basis according to the business day/252 convention. Volume outstanding (January 2011): BRL11.000. settlement occurs in USD using the PTAX rate. CDI futures are monthly futures with contract maturities covering the next four months and quarterly cycle months thereafter (January. global BRL bonds trade at a significantly lower yield than their domestic counterparts. also known as Pre/DI swap. April. Coupon: Semiannual. DI futures are traded out to 10 years. typically the yield level on the trade date of the contract that matches the maturity of the CDI swap. There is no upfront or intermediate cash flow during the life of the swap.
but it is still a nascent market.1062 0. 20 .158. and tax issues Regulation The Foreign Capital Law defines foreign capital as any cash funds that belong to foreign individuals or legal entities that enter Brazil for use in “economic activities”: investment in domestic securities and derivatives.005 2.000 12.944 792.005 31. Other swaps and derivative instruments Cupom cambial (DDI-futures) are futures contracts on the FX-adjusted DI rate. and September). a one-day average DI index tracking the daily return of the DI rate. The underlying asset is the spread between the interest rate obtained from the difference between the accumulated daily DI rates realized from the trade date to the last trading day.000. They are European-style calls or puts. as well. The contract has been designed to blend out CDI and FX risk. ie the IGP-M/CDI swaps and the IPCA/CDI swap. and foreign direct investment. Cupom-CDI swaps are cross-currency swaps with a fixed-rate. The last trading date in a CDI swaption is the last business day of the month immediately before the contract month. Cupom FRA or FRC is a forward rate agreement on onshore USD rates.000.216 17-Feb-11 2-Jan-15 50. these options trade on the BM&F. April. the same as with the underlying DI futures. and in the offshore market. Options on DI futures are European options on DI futures contracts. Liquidity has already improved over time. and have multiple contract months as maturity dates.371) 32.000) 50. Maturities are the same cycle months. foreign loans to Brazil. CDI swap valuation (example) Trade settlement date Maturity date Notional (BRL) Fixed rate (pay) Business days to maturity PV (BRL) Unwinding the swap Unwind date Maturity date Notional (BRL) Unwind rate Remaining business days CDI accrual Onshore fixed leg PV (BRL) Onshore floating leg PV (BRL) Onshore P&L (BRL) Total business days USD-BRL forward USD discount factor Offshore fixed leg FV (BRL) Offshore floating leg FV (BRL) Offshore FV P&L (BRL) Offshore FV P&L (USD) Offshore PV P&L (USD) Source: HSBC Interest rate options in Brazil are traded as options on DI futures and in the form of IDI options. investors can enter OTC CDI swaptions. typically up to one-two years out.54% 975 1. none of these has any meaningful liquidity now. In the onshore market. However. IDI options are effectively options on the average short-term rate over the transaction period.9231 (50. It effectively consists of two DDI contracts.792.481 347. typically three to 12 months after expiry.656.05% 1.541 Table 8. Regulatory.01247359 (31. but theoretically longer.762.000. Registration of foreign capital with the Brazilian Central Bank (BCB) is required and is essential for capital repatriation and profit remittance or reinvestment. Option expiries are typically any of the regular DI futures cycle months (January.034 1. Thus. Both are different conceptually. daily adjustment and margin requirements are settled on the next business day. USD-indexed leg and a floating-rate CDI leg (in BRL). IDI options are options on the IDI index.944 376. July. traded on the BM&F. settlement.Emerging Markets Brazil March 2011 abc Interest rate options 6-Jan-11 2-Jan-15 50.000 12. Premium. and the corresponding variation in the PTAX rate from the day before the trade date to the last trading day.405 502. traded on the BM&F. one maturing in the first DDI month (short leg) and the second one in the DDI month identical to the FRC traded month (long leg). Other derivatives include inflation-linked swaps. January and July tend to be the most liquid maturities.
br HSBS <GO> Table 9. Jan13. www. USD0.6bn swaps USD5m 1-month 1.com.cetip.1trn USD3-5m 5pips USD3-5m 5pips USD0. USD9. hedge funds. Foreign exchange For details on FX markets. Market Institutions HSBC Brazilian market page Source: HSBC www.br. it is essential to consult with legal and tax advisers to navigate individual circumstances. insurance companies. Table 10. Oct) Liquid tenors Short end.com.cetip.com. PTAX on the USD leg Business days/252 basis on the BRL leg.com.gov. 19 January 2011. please see HSBC’s Emerging Markets Currency Guide 2011: A guiding light.gov.br 9am-6pm Domestic market participants www.com. Oct ) Short end. Oct ) Short end USD10m 5bps CDI on the BRL leg. actual/360 on the USD leg Trading date O/N rate is published daily by Cetip at around 6pm. The most common type of foreign investment in securities and derivatives is governed by National Monetary Council (CMN) Resolution 2689.bcb.andima.Emerging Markets Brazil March 2011 abc Tax on financial activities (CPMF).br www.com. there are three kinds of taxes on financial operations in Brazil: Income tax with exemption for nonresident investors under certain circumstances. insurance companies.cetip. The IOF tax was reintroduced at a flat rate of 2% in October 2009 for fixed income and equities.cvm. Settlement All securities and OTC derivatives must be registered in a custody and settlement system authorised by the BCB or the Brazilian Securities Commission (CVM) in their respective areas of authority.gov. PTAX published by the Central Bank at around 6pm daily www. swaps. published by Cetip.br Business days/252 basis Trading date O/N rate is published daily by Cetip at around 6pm Cupom/Cambial Yes BM&F – first business day of each quarter ( Jan. Jan12.cetip. foreigners. Apr.5 vols Useful links Table 11. Jan17 Average trade size USD10k DV01 Bid/offer spreads under normal conditions (bp) 1-3bps depending on the tenor Fixing rate CDI. This rate was raised in October 2010 to 6% for new inflows into fixed income only.gov. Apr. The HSBC Brazilian Financial Markets Handbook has a step-bystep of account opening procedures and account structures.br Day count Business days/252 basis Effective date Fixing time (local time) Fixing page Local market hours Main participants Trading date O/N rate is published daily by Cetip at around 6pm Offshore IRS Yes BM&F – first business day of each quarter ( Jan.com. Local banks. Tax on financial transactions (IOF).fazenda.br www. and options. Offshore transfers of the ownership of these securities to other non-resident investors are not allowed. Jan12. Broadly speaking.br www. Jul.3bn outright.cetip. mutual funds.bcb. Eligible securities and derivatives include fixed-income debt securities and derivatives (exchange and OTC).br www.cetip.br 9am-6pm 9am-6pm Local banks. hedge funds.com. http://www. pension funds funds Source: HSBC 21 . Jul. Jul. which is not in effect currently. Apr. Jan13. such as futures.bmf.br www. Brazil: Interest-rate swap (IRS) and cross-currency swap (CCS) markets Onshore IRS Nonresident access Tenors Yes BM&F – first business day of each quarter (Jan. http://www. Investors also may consult other sources such as the BM&F Web site. Jan17 USD10k DV01 1-3bps depending on the tenor CDI. Information sources Brazil central bank Brazil’s Futures and Mercantile Exchange (BM&F) Brazil Ministry of Finance Brazil’s Securities and Exchange Commission CETIP (clearing house) National Association of Fin. pension foreigners.br www. Normal market conditions Onshore average daily volume Onshore spot transaction Onshore bid/ask spread Onshore forward transaction Onshore forward spread Offshore average daily volume Offshore bid/ask spread Implied option volatility spread Source: HSBC Taxation Regarding taxes on financial transactions for foreigners. published by Cetip. except in cases of inheritance or corporate reorganization (eg a merger). mutual funds.
5bn T+0 Selic Local banks.3bn for NTN-F T+0 Selic Local asset managers. 2/month (NTN-F) Brokers and banks T+1 OTC/BM&F 9am-6pm Yield up to 2 (sometimes 3) decimal places 1-3bp BRL10m BRL 3bn for LTN. currently 2/month Brokers and banks T+1 OTC/BM&F 9am-6pm Yield up to 2 (sometimes 3) decimal places 1-3bp BRL20m BRL1. money market funds National treasury Brazilian real (BRL) Scripless BRL1.000 1-10 years (NTN-F) – 1-2 years (LTN) Fixed (NTN-F) – Zero (LTN) Semiannual (NTN-F) – Zero (LTN) Bullet Business days/252 BRL 527bn Yankee Per month: BRL15bn (LTN). 1.000 1-40 years IPCA linked (B).000 1-5 years Zero Zero Bullet Business days/252 BRL530bn Dutch BRL7bn per month Weekly Brokers and banks T+1 OTC/BM&F 9am-6pm Yield up to 2 (sometimes 3) decimal places 1-3bp BRL45m BRL0. local banks CB registration required Local custodian required (Selic) Exempt Only if holding is less than 30 days IOF and CPMF CB registration required Local custodian required (Selic) Exempt Only if holding is less than 30 days IOF and CPMF CB registration required Local custodian required (Selic) Exempt Only if holding is less than 30 days IOF and CPMF 22 . 4bn (NTN-F) Weekly (LTN). IGP-M linked (C) Semiannual Bullet Business days/252 BRL446bn Dutch BRL5bn per month Ad-hoc. foreigners LFT National treasury Brazilian real (BRL) Scripless BRL1.Emerging Markets Brazil March 2011 abc Table 12: Brazil: Bonds NTN-F and LTN Issuer Currency Form Minimum denomination Tenors Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume daily Settlement Clearing Main participants Regulations for foreign investors Restriction on foreign investment Custodian Interest income tax Capital gains tax Entry/exit * 30/360 in most cases Source: HSBC NTN-B and NTN-C National treasury Brazilian real (BRL) Scripless BRL1.8bn for NTN-Bs T+0 Selic Pension funds. foreigners.
Bloomberg 23 . Both bonds are due in 2020. which tend to be buy-and-hold fixed-income investors. Chart 16. Chile’s local government bond market is the third-largest in the region. Another idiosyncrasy of the Chilean local market is that there are two issuers for government debt: the central bank and the finance ministry. for the first time ever. BCU. is only one of two Latam markets with a noteworthy inflationlinked swap market. The government’s stated strategy. Bloomberg 1-3yr 18% Source: HSBC. The maturity structure of the domestic government bond stock is well-balanced. a CLP-denominated global bond in USD0. with BTU. after those in Brazil and Mexico.Emerging Markets Chile March 2011 abc Chile Chile is the third-largest domestic market in Latam It is one of only three markets in the region with a liquid swap market A key characteristic is the high degree of inflation indexation Market structure With more than CLP17trn (USD36bn) in local-currency domestic bonds outstanding. in the aftermath of the earthquake. Chile came to the international capital markets for the first time since 2003. with a relatively long average maturity. and PRC the main inflationlinked instruments constituting more than 60% of all bonds outstanding (in terms of notional). Government bonds maturity profile +10yr 14% BTP 6% up to 1yr 30% Nominal Inflation-linked BTU 38% PDBC 17% 5-10yr 25% BCU 23% 3-5yr 13% Source: HSBC. Chile is one of only three markets with liquid swap markets.5bn issue size. recent legislation simplifies taxation of foreign investors in Chile’s sovereign bonds. Recent developments In 2010. Chile ranks between those two markets. On the domestic bond side. One surprising characteristic of the market. The sovereign issued USD1bn of a global dollar bond and. is the high degree of inflation-linked government debt (see Chart 16). partly because the local market is dominated by a very large system of pension funds (AFP). and together with Mexico. Local debt composition PRC 3% BCP 13% Chart 17. as access is easier in Chile than in Brazil but it requires more red tape than Mexico in terms of setting up custodial accounts. foreign participation is surprisingly small in the Chilean domestic government bond market. In addition. given the country’s long history of inflation-targeting and relatively low rates of inflation in the past decade. an increase in foreign participation through further Global CLP issuance appears likely. Liquidity is not as high as in Brazil and Mexico. Because of all of these factors. In terms of access. In that sense. is to increase the depth and liquidity of the financial system and to provide wider access. in the Bicentennial Capital Markets Agenda.
AFPs will be able to invest as much as 80% of their assets abroad. The document reports the vote of each board member on the resolutions passed during the session. and liquidity deposits and lines of credits (expanded facilities). The central bank board is composed of five members appointed by the president. with approval by the senate. repo. and provided the majority of board members remain in favor. whichever comes first. Decisions are made by simple vote of board members present at each meeting. futures) IRS Market liquidity statistics Daily turnover Buying volume in a single day with minimal market impact Bid/offer spreads under normal conditions (bp) Source: HSBC There is a continuing trend by the regulator to encourage local pension funds to invest abroad. The BCCh implements its monetary policy by defining a target level for the nominal interbank interest rate (tasa de política monetaria. Consistent with the adaptation of an inflationtargeting regime. or TPM). buying and selling short-term promissory notes. bond issued after 2010 with tax benefits without capital gains Offshore investors’ access Foreign ownership of government bonds Yes As % of outstanding c7% Direct purchase Through banks or stockbrokers Subject to cap No Registration requirement Yes Access to inshore funding No Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps. with a 1% tolerance interval on either side of the target. bank bonds Mark-to-market requirements Banks Yes Insurance companies Yes. the central bank must regulate financial system liquidity (or reserves) through the use of several instruments: open market operations. Once this period has expired. The finance minister is allowed to attend the meetings. Both the governor and vice governor can be reelected. published by the National Institute of Statistics (INE). except LT hedging Pension funds Yes Mutual funds Yes Taxation: Government bonds Onshore investors General regime. and measured relative to the CPI index. These appointments last for 10 years. with a voice in deliberations and the ability to suspend for as long as 15 days the implementation of any resolution. Policy decisions are made at monthly meetings but can also be made at special meetings. corp bonds. with the BCCh governor casting the decisive vote in case of a tie. the board’s decision takes effect with the simple publication of the resolution in the official gazette. 24 . The inflation target is currently 3%. and this person remains in this position for the duration of his or her term. Another important element for the BCCh’s policy transparency is publication of the Monetary Policy Report every four months and the Financial Stability Report semiannually. the exchange rate band was abandoned in 1999 in favor of a free-floating regime. different bonds and tenors Depending on tenor. no specific taxes Offshore investors 4% WHT. Members can be reappointed for another 10-year term. The board itself elects the vice governor from among its members. USD 300m. although in practice the BCCh does not use this as an active monetary-policy instrument. By September 2011. treasury. Monetary policy The Banco Central de Chile (BCCh) conducts an inflation-targeting regime. which is part of the government’s strategy to stem appreciation of the CLP.Emerging Markets Chile March 2011 abc Table 13: Chile: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Yes Onshore interbank Yes Offshore investors with onshore No Onshore nonbank investor (eg custodian) with onshore No Eligible collateral for repos For CB repos Central bank bonds For interbank repos CB. or 15 days following the meeting. liquid tenors USD30m 5 for liquid tenors The meeting minutes are made public five business days before the next scheduled meeting. Maintaining inflation close to the target level is a perennial objective in a medium-term horizon of two years. These tools also include the banking reserve over deposits. 35% capital gains. and positions are renewed every two years on a rotating basis. To ensure that the interbank rate falls within the desired range.
5% for older issues. BTU (Bonos de la Tesorería General de la República en unidades de fomento) are inflation-linked bonds issued by the national treasury.1trn.1% and 4.3trn. There are three types of inflationlinked bonds: BCU. PRC (Pagarés reajustable Cupón) are sinking-fund. Volume outstanding (February 2011): CLP2. Interest: 0%. and 10-year issues. Global CLP bonds trade at a significant premium over the domestic bond curve. with coupon and redemption linked to the CPI. BTP (Bonos de la Tesorería General de la República en pesos) are fixed-rate peso bonds issued by the national treasury. Coupon: Semiannual. issued by the treasury. Coupon: Semiannual.and UF-denominated bonds in the domestic market.5% of August 2020. 15 bonds are outstanding. issued by the central bank. HSBC provides indicative prices for Chilean domestic government debt securities via Bloomberg page HSCH. more liquid by a relatively small margin. Volume outstanding (February 2011): CLP520bn. PDBC. 90. Global CLP bonds Less than 40% of Chile’s domestic government debt is nominal fixed-rate. with CLP 272bn outstanding. Government debt includes the debt of the treasury department and the central bank. Amortization: Bullet at maturity. and these are tapped or issued in regular auctions. Tenor: 5. zero-coupon bonds issued by the central bank. Currently. global CLPdenominated bonds provide access to local market yields.3trn. Volume outstanding (February 2011): CLP4trn. also issued by the central bank. 6% and 8%. Tenor: 30. Though formally counted as external debt. There are three types of nominal fixed-rate bonds: BCP. inflation-linked bonds issued by the central bank. Tenor: 2-. CLP fixed-rate debt securities More than 60% of Chile’s domestic government debt is inflation-linked. Interest: 3%. and 360 days. Tenor: 5. payable in CLP at the current CLP/UF rate. and PRC. Amortization: Bullet at maturity. before 2007 issued with 5%.to 30-year issues. issued by the treasury. BCP (Bonos del Banco Central de Chile en pesos) are fixed-rate peso bonds issued by the BCCh. Interest: Current issues 3%. with odd coupons between 2. the Global CLP 5. Interest: 6%. 180. Amortization: Bullet at maturity. issued by the central bank. Volume outstanding (February 2011): CLP1. and 20-year issues. 10-. Coupon: Semiannual. These issues provide referential real and nominal interest rates for other domestic debt. see Bloomberg ticker CHUF. Interest: Current issues 3%.Emerging Markets Chile March 2011 abc UF inflation-linked floating-rate debt securities Local fixed income instruments Bonds The government issues peso. BCU (Bonos del Banco Central de Chile) are inflation-linked bonds issued by the BCCh and denominated in UF. Only one issue exists at present. The accounting unit used for inflation indexation is called UF (unidades de fomento). Volume outstanding (February 2011): CLP2. Tenor: As long as 20 years.to 10-year issues.9trn. Amortization: Bullet at maturity. and BTP. and is published by the BCCh on a daily basis. Amortization: Sinking fund. also denominated in UF. Volume outstanding (February 2011): CLP6. 5-. 25 . PDBC (Pagarés Descontabes del Banco Central de Chile) are zero-coupon peso notes issued by the central bank. Amortization: Bullet at maturity. Coupon: Semiannual. As in Brazil and Colombia. payable in CLP at the current CLP/UF rate. Tenor: 5-. BTU.
00-13. An investor buys the contract for CLP1m. which are typically settled at maturity). one can buy or sell one UF unit at a future date. the Cámara fix really represents the banks’ funding cost. insurance companies Yes 1-20Y 1-5Y CLP5bn or UF300k 5bp ICP: Published by Abif. which are users of the instrument. The Cámara rate can be monitored on Bloomberg using the ticker CHIBNOM.000.abif.Emerging Markets Chile March 2011 abc Another variant is the UF x Cámara swap. Chile: Interest-rate swap (IRS) and cross-currency swap (CCS) markets Onshore IRS Nonresident access Tenors Liquid tenors Average trade size Bid/offer spreads under normal conditions (bp) Fixing rate Day count Effective date Fixing time (local time) Fixing page Local market hours Main participants Source: HSBC Offshore IRS Yes 1-20Y 1-5Y CLP5bn or UF300k 5bp Abif Act/360 T+2 Abif www. UF x Cámara swaps are traded out to 20 years with bid-offer spreads of 20bp typically. In the OTC market. the 9 August 11 UF forward is trading at 22. For the most part. The Cámara is calculated by taking the weighted average of the interbank rate and is published daily by the central bank. www. Example: On 9 February 2011.abif. converted to CLP using the CLP/UF exchange rate at the time of payment (see the Bloomberg ticker CLF). the contract is settled by exchanging the difference between the price agreed at the trade date and the actual value of the UF (an index that adjusts on a daily basis).cl 9. UF forwards Derivatives Chile has an active swap market.abif. and paid semiannually on an actual/360 basis against the fixed rate (except swaps with a tenor of less than one year. though liquidity in nominal swaps trading is somewhat thinner than that in Brazil and Mexico and rather limited in UF swaps. The compound index is called ICP and can be tracked on the Bloomberg ticker CLICP (based to September 2002). On the maturity date. with both nominal and inflation-linked swaps.00 Local banks and offshore banks. where the fixed leg becomes inflation-linked. Liquidity goes from six months out to 10 years.cl 9.000.abif.00-13.00 Local banks and offshore banks. Cross-currency swaps CLP/Libor swaps provide the ability to receive or pay a fixed rate in CLP versus floating-rate in six-month Libor (denominated in USD). Cámara swaps The most common interest rate swap is the fixed for floating CLP x Cámara swap. Payments occur semiannually. but tends to be higher in the short end. on an actual/360 basis.00-13. Table 14. Prices are quoted on the Bloomberg page HSCH => Option 3. offshore hedge funds Onshore CCS Yes 1-20Y 1-5Y CLP5bn or UF300k 5 bp Abif Act/360 T+2 Abif www. the UF index is at 24. so there is typically no or only a small basis to the monetary policy rate set by the BCCh.cl Act/360 T+2 ICP: Published by Abif www.cl 9. Assume that on 9 August 2011. There are significant hedging needs from corporate issuers. which means the investor would stand to receive CLP2m. Typical bid-offer spreads are 5bp but tend to go wider when volatility increases. The floating leg is called Cámara. It is an overnight rate that is compounded on a daily basis.00 Local banks 26 .
cl http://www.bcentral.5bn 50pips USD1.svs. which applies to nonresidents but not to institutional investors. which may be waived if a double taxation agreement is in place.ine. Taxation Foreign investors are subject to capital gains tax of 35%.minhda. the authorities are in the middle of implementing a new regulation to make it easier for foreign investors to buy local sovereign debt and simplify taxation for foreigners.cl http://www. and tax issues Regulation Access to Chile’s domestic bond market has been simplified but is still relatively more cumbersome than in comparable countries. please see HSBC’s Emerging Markets Currency Guide 2011: A guiding light. 19 January 2011.cl http://www.7 vol (USD30m) Useful links Table 16. At the time of this writing. Table 15.5bn 30pips USD1.Emerging Markets Chile March 2011 abc Foreign exchange For details on FX markets.cl http://www.0bn spot USD2. settlement.cl HSCH <GO> 27 . http://www. Please seek legal or tax advice before making an investment decision.safp. Normal market conditions Onshore average daily volume Onshore spot transaction Onshore bid/ask spread Onshore forward transaction Onshore forward spread Offshore average daily volume Offshore bid/ask spread Implied option volatility spread Source: HSBC Regulatory. Foreign investors need to obtain a tax identification number and typically sign a custodial agreement with a bank or broker.0bn 50pips 6-months 0. there is a 4% income tax.cl http://www. swaps settle on T+2. Information sources Banco Central de Chile (BCCh) Ministry of Finance National Statistics Institute (INE) Electronic securities exchange Securities commission Pension fund regulator HSBC Chile page Source: HSBC Settlement Settlement for domestic bonds is conducted through a central depository (DCV) and settled on T+1. USD4.bolchile. In addition.
0m Monthly Banks.0m 2. and mutual funds BTP National treasury Chilean peso (CLP) Scripless CLP5. 5. insurance companies. bonds issued from 2010 CG 0%. subject to certain requirements Entry/exit 4% of the interest received Source: HSBC Need to open local custody with tax ID Capital gains (CG) and withholding tax (WHT) For offshore investors: CG 35%.30 Yield semi act/365 3 bp BCU 5y -10y. T+1. 10. and mutual funds BCP Chilean central bank Chilean peso (CLP) Scripless CLP5.3trn Dutch CLP20.30-13. pension funds.0m 5. banks. mutual funds.30-13. 5bp for others UF100. mutual funds.0m Zero Zero Bullet Actual/360 CLP2. bonds issued from 2010 CG 0%. and mutual funds Regulations for foreign investors Restriction on foreign Need to open local custody investment with tax ID Custodian Interest income tax Capital gains (CG) and withholding tax (WHT) Capital gains tax For offshore investors: CG 35%. and mutual funds PDBC Chilean central bank Chilean peso (CLP) Scripless CLP5.0m Monthly Banks. T+2 Local custodian DCV (Deposito Central de Valores) Pension funds. settles in CLP Scripless UF500 5. banks.30 Yield semi act/365 3 bp BTU 5y -10y.9trn Interactive CLP20. subject to certain requirements 4% of the interest received 28 .000 Daily UF4m T+0. T+2 Local custodian DCV (Deposito Central de Valores) Pension funds. subject to certain requirements 4% of the interest received Exchange or OTC 9. and 10 years 3%. T+1. insurance companies.30-13. and 8% fixed Semiannual Bullet Actual/360 CLP2. insurance companies. and mutual funds BTU National treasury UF.0bn Weekly Banks. banks Dutch UF3.30 Yield semi act/365 5bp CLP1bn CLP20bn T+0.1trn Dutch CLP20.000 Monthly Banks. insurance companies. pension funds. 6%. pension funds.to 30-year 3% fixed currently Semiannual Bullet Actual/360 CLP6. insurance companies. insurance companies. insurance companies.30 Yield act/30 2bp CLP 1bn CLP40bn T+0. mutual funds. T+1. stockbrokers Need to open local custody with tax ID Capital gains (CG) and withholding tax (WHT) For offshore investors: CG 35%. subject to certain requirements 4% of the interest received Exchange or OTC 9.to 10-year 6% Semiannual Bullet Actual/360 CLP1. subject to certain requirements 4% of the interest received Exchange or OTC 9.000. insurance companies.3trn Dutch UF3. banks. and 20 years Coupon/discount 3% fixed currently Coupon frequency Semiannual Amortizing schedule Bullet Day count Actual/360 Amount outstanding CLP4trn Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Exchange or OTC 9.30-13. stockbrokers Need to open local custody with tax ID Capital gains (CG) and withholding tax (WHT) For offshore investors: CG 35%. banks.000 (about USD4m) Daily UF4m (USD160m) T+0. stockbrokers Need to open local custody with tax ID Capital gains (CG) and withholding tax (WHT) For offshore investors: CG 35%. bonds issued from 2010 CG 0%. pension funds. bonds issued from 2010 CG 0%. settles in CLP Form Scripless Minimum denomination UF500 Tenors 5. pension funds. stockbrokers Exchange or OTC 9.30-13. T+1.000. 5bp for others UF 100. T+1 Local custodian DCV (Deposito Central de Valores) Pension funds. T+2 Local custodian DCV (Deposito Central de Valores) Pension funds. mutual funds. Chile: Bonds BCU Issuer Chilean central bank Currency UF. insurance companies.Emerging Markets Chile March 2011 abc Table 17. T+2 Local custodian DCV (Deposito Central de Valores) Pension funds.30 Yield semi act/365 5bp CLP1bn CLP 20bn T+0. bonds issued from 2010 CG 0%.000 Monthly Banks.
Colombian local government debt by currency composition Chart 19. as well UVR TES (inflation-linked) face increasing demand due to rising inflation Foreign participation in the local market is materially lower than in regional peers Market structure Local debt has become increasingly relevant in Colombia over the past 10 years. including fixed-income paper. The proportion of locally issued paper with respect to total government debt reached 75% at the end of 2010 from only 25% in 2001. Even though this reform represents a step to increase foreign participation in the local market. Local debt composition by rate structure (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 6% USD COP UVR 22% COP 4% 69% Jun-01 Dec-02 Jun-04 Dec-05 Jun-07 Dec-08 Jun-10 Source: Ministry of Finance and Public Credit COP Fixed TES IPC TES UVR Others Source: Ministry of Finance and Public Credit 29 . Inflation-linked UVRs trail by far in size and liquidity. foreign investors need only to appoint a local administrator to access the local market. and brokerage houses. also carrying the highest liquidity. Colombia arguably has the region’s lowest proportion of foreign investors in its local market. though foreign investors are active in Global TES. This regulatory change was made possible by the issuance of Decree 4800. accounting for only c2% of the total. Within local debt. and the IPC-linked has lost its appeal since the government discontinued its auctions. local Banks. with much looser requirements. the current 33% income tax should continue to discourage any large flow of foreign investment into the country. fixed-rate TES is the largest paper outstanding. Chart 18. The main market participants in the local market are pension funds. Recent developments Effective this year. foreign investors are allowed to participate in several local market instruments. Instead of having to set up a foreign capital investment fund (FCIF).Emerging Markets Colombia March 2011 abc Colombia Fixed-rate TES is the most important local instrument.
which means they may remain on the board as long as 12 years. TRDs. FOGAFIN Mark-to-market requirements Bank Yes Insurance companies Yes Pension funds Yes Mutual funds Yes Taxation: Government bonds Onshore investors Withholding tax over interest: 7% less than 5Y and 4% more than 5Y Offshore investors Income tax 33% Offshore investors’ access Foreign ownership of government bonds As % of outstanding 1.2trn Onshore interbank COP200bn Offshore investors with onshore N/A Onshore nonbank investor (eg custodian) with onshore N/A Eligible collateral for repos For CB repos TES. halfway through the presidential term.Emerging Markets Colombia March 2011 abc Table 18. BanRep’s board of directors consists of seven members with one vote each: the finance minister. see the Bloomberg ticker CORRRMIN. which either provides liquidity to the economy or withdraws liquidity from it. BanRep affects the market interest-rate curve. The Colombian president replaces two of the full-time members every four years. Through these changes in the overnight lending rate. The benchmark of the local TES curve is the Coltes 2020. Source: Ministry of Finance and Public Credit 30 . Under the constitution. five full-time members. who is appointed by the other members. which should result in growing foreign participation in domestic securities. and the bank’s general manager.0trn Buying volume in a single day with minimal COP200bn market impact Bid/offer spreads under normal conditions (bp) 2. corporates. TCO. Colombia: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank COP2. TDAs. Chart 20. Key policy rates The benchmark monetary policy rate used by the central bank) is the BanRep overnight lending rate. repo. Títulos de Deuda Externa. twice renewable. BanRep is independent from the other branches of government and is subject to its own legal regulation. FOGAFIN For interbank repos TES.5 Source: HSBC Monetary policy The Banco de la República de Colombia (BanRep) follows an inflation-targeting rule that aims to keep the consumer price index between 2% and 4%. futures) Yes Market liquidity statistics Daily turnover COP6. Full-time members and the general manager are appointed to terms of four years. Foreign participation in the local fixed income market is still significantly lower than that in other markets in the region.527% Direct purchase No Subject to cap Yes Registration requirement Yes Access to inshore funding No Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps. Bonos para la seguridad. Colombia’s debt profile looks heavily front-loaded. TCO. compared to long-term debt obligations. where most of the liquidity is concentrated. The Colombian government in 2010 showed a preference to issue COP-denominated paper over external debt. Total debt amortization profile (USDbn) 16 14 12 10 8 6 4 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Local External Local fixed income instruments The Colombian local debt market is composed mainly of fixed-rate TES bonds (see Chart 19). The central bank implements monetary policy by changing the overnight lending interest rate. Local debt accounts for most of short-term debt payments (see Chart 20). Yet regulation continues to stand in the way of a more heterogeneous market.
Taxation Foreign investors are subject to a withholding tax of 7% for short-tenor bonds of less than five-year maturities and 4% for long-tenor bonds of more than five-year maturities. These instruments carry a fixed coupon and amortize their capital at maturity. The UVR index is published daily by the central bank. Global TES are COP-denominated bonds with USD settlement and issued under foreign law. Withholding tax is deductible from the income tax of 33%. COP inflation-linked debt securities Regulatory. The standard settlement period for fixed income instruments is T+0 on a delivery versus payment (DVP) basis. COP fixed-rate debt securities Local TES B are government bonds with maturities from one to 14 years. Clearing for these instruments is available through Euroclear. which follows the consumer price index with a one-month lag. Regarding gains from currency appreciation. Nonresidents may access the FX forward market to hedge currency risk on underlying investments. the central bank resets the UVR index for the following 30 days based on the previous month’s CPI reading. The face value of these bonds is expressed in UVR units and is adjusted by the UVR index. Global TES bonds Settlement Government bonds are settled electronically through Sebra/Deceval administered by BanRep. On the 15th of every month. Bonds The Ministry of Finance and Public Credit is responsible for all government debt issuance. UVR/USD Libor curves extend from one to 10 years. with poor liquidity across the curve. Foreign investors must appoint a local custodian.to 10-year tenors.Emerging Markets Colombia March 2011 abc Derivatives Cross-currency swaps exist for both COP/USD Libor and UVR/USD Libor. TES UVR (unidades de valor real) are inflation-linked instruments with maturities ranging from one to 13 years. allowing foreign investors exposure to local currency bonds without the need to comply with local regulations. UVR paper carries an annual fixed coupon and amortizes capital at maturity. The average trade size is USD10m. Yet BanRep announces the conditions of each auction one day before the scheduled date. The USD/COP exchange rate that is used to calculate coupon and principal payments is a 20-day average of the average market rate on the third business day before the payment. COP/USD Libor curves extend from one to 15 years with liquidity concentrated in two. The nominal amount is measured in COP. TES IPC is an inflation-linked instrument with maturities ranging from one month to three years. Bid-offer spreads could be as high as 100bp. Fixed-rate TES and inflation-linked UVR TES are the only two instruments with scheduled auctions. and tax issues Regulation Foreign investors may access Colombian local fixedincome instruments directly through an appointed local administrator. investors are is no longer required to have a foreign capital investment fund (FCIF). settlement. with bid-offer spreads of 15-20bp. Auctions for this paper take place twice a month. the former issued biweekly in sizes of about COP500bn and the latter auctioned monthly in amounts close to COP400bn. The administrator can be a local broker dealer or a fiduciary. the TES IPC has a floating annual coupon that reflects the 12-month trailing CPI rate plus a premium in basis points. The local TES curve is the most actively traded in Colombia. a 16% value-added tax is applicable to them if and when funds are repatriated. 31 . Since the issuance of Decree 4800 in December 2010. Unlike the TES UVR.
0m COP3 USD500m COP3 6-month 1 vol Useful links Table 20.banrep.co www.co www.gov.0m COP2 USD10.co 32 .co www.gov. 19 January 2011.dane.0bn USD10. Information sources Banco de la Republica (BanRep) Ministry of Finance and Public Credit National Statistics (DANE) Stock exchange Securities commission Source: HSBC www. Table 19.gov.minhacienda.superfinanciera.Emerging Markets Colombia March 2011 abc Foreign exchange For details on FX markets. Normal market conditions Onshore average daily volume Onshore spot transaction Onshore bid/ask spread Onshore forward transaction Onshore forward spread Offshore average daily volume Offshore bid/ask spread Implied option volatility spread Source: HSBC USD1.gov.co www.bvc.gov. please see HSBC’s Emerging Markets Currency Guide 2011: A guiding light.
local banks.000 10-15 years Inflation-linked Annual Bullet NL/365 COP5.6trn Dutch N/A No schedule Foreign banks T+3 OTC Yield up to 2 decimal places 15-25bp COP5. Pension funds.0bn COP5.0bn COP10bn T+0 Sebra/Deceval Offshore banks. brokerage houses.2trn Dutch COP500bn Biweekly Local banks and brokerage houses (market makers program) T+0 SEN/MEC/OTC 8am-4pm Yield up to 2 decimal places 2bp COP5. and foreign investors TES UVR Finance ministry Colombian peso (COP) Scripless UVR10. brokerage houses. local banks.3trn N/A N/A No schedule N/A T+0 SEN/MEC/OTC 8am-4pm Yield up to 2 decimal places N/A N/A N/A T+0 Sebra/Deceval Pension funds.000 From 6 months to 13 years Inflation-linked Annual Bullet NL/365 COP30. and foreign investors No No Yes Yes No TES IPC Finance ministry Colombian peso (COP) Scripless COP500. and foreign investors Need to open a trading account with an appointed administrator Local custodian required Yes Yes No Global TES Finance ministry Colombian peso (COP) Scripless 5-10-17 years Fixed Annual Bullet NL/365 COP5.0m COP5. and foreign investors Need to open a trading account with an appointed administrator Local custodian required Yes Yes No Regulations for foreign investors Restriction on foreign investment Need to open a trading account with an appointed administrator Custodian Local custodian required Interest income tax Yes Capital gains tax Yes Entry/exit No * 30/360 in most cases Source: HSBC 33 .Emerging Markets Colombia March 2011 abc Table 21. brokerage houses.3trn Dutch COP400bn Monthly Local banks and brokerage houses (market makers program) T+0 SEN/MEC/OTC 8am-4pm Yield up to 2 decimal places 4bp UVR20.000 From 6 months to 14 years Fixed Annual Bullet NL/365 COP98. Colombia: Bonds TES Tasa Fija Issuer Currency Form Minimum denomination Tenors Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Finance ministry Colombian peso (COP) Scripless COP500. local banks.0bn T+0 Sebra/Deceval Pension funds. brokerage houses.0trn T+0 Sebra/Deceval Pension funds. local banks.
Since 1999. such as credibility of monetary policy. The weighted average maturity now stands at almost seven years. nominal fixed-rate debt increased from 15% in 2000 to 58% at the end of 2010. To reach this objective. domestic debt represents about 80% of the central government’s debt. During that time. Central government debt distribution 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Domestic Source: Ministry of Finance Chart 22. hold 20% and local mutual funds 15%. Chart 21. and transparency of FX policy. and other local investors. Afores. The Mexican debt market is one of the most liquid in EM and has strong participation by foreign investors and local pension funds. the government has extended the yield curve from a maximum maturity of one year to the current 30 years. Local pension funds. Nowadays. The rest is distributed among local banks. up from 55% in 2000. Other factors also have contributed to development of the local rates market.Emerging Markets Mexico March 2011 abc Mexico Domestic debt represents 80% of central government debt Government will continue to extend the duration of its total debt portfolio Foreign investors are exempt from withholding tax on government bonds Market structure Over the past 10 years. In terms of breakdown. Foreign investors hold 22% of the central government’s total domestic debt. the strategy has focused on increasing the relative importance of domestic debt in the central government’s debt portfolio. the Mexican government has reduced the vulnerability of public debt to FX swings by increasing the weight of fixed-rate debt in its debt stock. insurance companies. price stability and pension system reform have played important roles to generate confidence among domestic and foreign investors. prudent management of fiscal accounts. Domestic debt distribution by rate type 100% Inflation-linked 80% 60% 40% 20% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Ministry of Finance % Floating-rate Fixed-rate Ex ternal 34 .
2bn) in 2010. An important factor that contributed to the recovery of the local debt market was the inclusion of local fixed-rate bonds. the government expects to increase gradually the share of inflationlinked bonds in the total domestic debt portfolio in the next few years. the government has returned gradually to the structure of securities issuance that prevailed before the crisis. About 99% of these flows were placed among the 19 MBonos eligible for the WGBI. In that sense. In addition. Risk indicators of the debt portfolio have started to improve. in Citi’s World Global Bond Index (WGBI) on 1 October 2010.to five-year bonds). Nineteen MBonos were eligible to be included in the index with a total market value of MXN116bn. corporate bonds Mark-to-market requirements Banks Yes Insurance companies Yes Pension funds Yes Mutual funds Yes Taxation: Government bonds Onshore investors Withholding tax of 0. The syndication program will be used for 5-. Regarding inflation-linked bonds. In particular. This contributed to the recovery of domestic markets following the financial disruption of 2008 and 2009.65% of the WGBI. For 2011. Total inflows to the MBonos market were MXN165bn (cUSD13. which represents a market weight of 0. futures) Yes (IRS) Market liquidity statistics MBonos Daily turnover MXN15bn Buying volume in a single day with minimal MXN50m market impact Bid/offer spreads under normal conditions 3bp Udibonos Daily turnover MXN5bn Buying volume in a single day with minimal MXN30m market impact Bid/offer spreads under normal conditions 3bp to 5bp Cetes Daily turnover Buying volume in a single day with minimal market impact Bid/offer spreads under normal conditions Source: HSBC Recent developments Throughout 2010. MXN170bn Cetes) As % of outstanding 23% Direct purchase Yes Subject to cap No Registration requirement Yes Access to inshore funding No Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps or IRS. leading to better liquidity in the secondary market and a wide allocation among local and foreign investors. Mexico: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Yes Onshore interbank Yes Offshore investors with onshore No Onshore nonbank investor (eg custodian) with onshore Yes Eligible collateral for repos For CB repos Federal government bonds For interbank repos Commercial paper. the government’s strategy will be focused on financing most of the fiscal deficit in the domestic debt market favoring placement of longterm nominal bonds and inflation-linked bonds.Emerging Markets Mexico March 2011 abc Table 22. and 20-year bonds. This program is only complementary. the government started to sell bonds through debt syndication. MXN23bn MXN200m 3bp In the first case. MBonos. and more than 50% in short-term bonds (one. foreign investors’ holdings in nominalfixed rate bonds increased sharply in 2010. 35 . This ensures that new issuances have larger initial amounts outstanding. it has not replaced the issuance policy of weekly auctions. public debt policy facilitated the recovery of the local financial markets and kept a high degree of flexibility to adapt to financial markets changes. 10-. following deterioration during the global financial crisis. The inclusion of MBonos in the WGBI fostered several changes in the issuance policy. the government will focus on strengthening the liquidity and efficiency of longterm government securities through the bond reopening policy that maintained a reduced number of benchmark bonds with a considerable amount outstanding. the government aims to foster development of the real interest rate curve due to increasing demand for these securities originated from public sector workers’ pension reform (ISSSTE). As the minimum size for individual MBonos was established at MXN10bn.5% Offshore investors Exempted when there is tax treaty Offshore investors’ access Foreign ownership of government bonds MXN696bn (of which MXN492bn is MBonos. repo.
Key market rates 28-day TIIE rate: The interbank equilibrium interest rate is the benchmark rate that applies to commercial bank loans and is published by Banxico at 12. it releases quarterly inflation reports about five weeks after the end of every quarter. public enterprises. it appears likely that the government will implement measures to continue development of this market. HSBC provides indicative prices for Mexican domestic government debt securities via Bloomberg page HSMX. or c35% of GDP. Also. It is a representative interest rate on one-day repo and one-day outright operations with 36 . Deputy governors serve for eight years and are replaced alternately every two years. Its main mandate is to preserve the currency’s purchasing power. The Bloomberg ticker is MXONBR. The governor serves for six years. Banxico established an inflation-targeting regime with an objective of 3% and a variability band of +/-1%. and the total amount of eligible bids sent by the market maker. Banxico releases on its Web site the minutes of the monetary policy meetings two weeks following each session. Banxico uses open market operations such as repos and deposit/lending facilities. In addition. Eligible bids are those for which the yield is equal to or lower than the highest yield allocated in the primary auction.Emerging Markets Mexico March 2011 abc certificates of deposit. Back in 2001. multiplied by some factor. and agencies. a money market liquidity measure. The governor and the deputy governors serve alternately. This was a consequence of the inclusion of the nominal fixed-rate bonds to the Citi’s World Government Bond Index (WGBI). IPAB (explained below). Market makers may buy the smallest amount between the 20% of the total amount placed in the primary auction for each bond. corporate sector. Segregation and reconstitution of fixed-rate bonds and inflation-linked bonds (STRIPS) has been possible since 2005.30 pm local time on a daily basis. Monetary policy The Banco de México (Banxico) is an autonomous entity that conducts monetary policy. given the potential growth of the life annuities market. starting in the middle of a six-year presidential term and ending after the first three years of the following presidential term. To calculate it. In 2011. every day Banxico surveys seven banks between 11:45 am and 12:00 pm local time to quote MXN350m. Foreign participation in the Mexican government bond market jumped to 21% of the total amount outstanding at the end of 2010. The instruments used for open market operations are government securities: Bondes D (floaters) and/or Cetes (bills). which have the right to participate in the “green shoe” one working day following the weekly auction day. The operational tool to conduct monetary policy since January 2008 has been the policy rate called the Fondeo rate (overnight rate or tasa de fondeo). Banxico used el corto. See Bloomberg ticker MXIBTIIE. This amount included central government debt. The president may not remove any governing board members from their posts. Previously. Approximately 63% of the bond market is composed of central government bonds. market makers have access to the securities lending program with Banxico for as much as 2% of the total amount outstanding for each bond. from 12% a year earlier. The rest is explained by corporate and agency bonds. as a monetary policy instrument based on a target level for banks’ current account balances at the central bank. The Banxico board meets eight times per year. Local fixed income instruments The size of the Mexican domestic bond market as of November 2010 was about USD343bn. and bankers’ acceptances traded by banks and stock brokerage firms in the wholesale market. The calendar of meetings is released on the central bank’s Web site. There are eight market makers. for each bond. bank notes. Key policy rates Fondeo rate: This is the overnight rate charged in the interbank market. as two-thirds of the increase was concentrated in the bonds that were eligible to the WGBI (USD13bn) and the remainder was increased mainly in government bills (Cetes). Banxico has a collegiate body consisting of a governor and four deputy governors who are appointed by the Mexican president and ratified by the senate.
MBonos holdings by foreign residents MXNm 500. Federal government development bonds with fixed interest rate (MBonos): These nominal fixed-rate bonds are issued by the federal government. and 30-year bonds every six weeks. which is calculated on an actual/360-day basis. 10-. BPA182 pay interest on a semiannual basis. These bonds have been the base for development of the local market and enlargement of the yield curve. MBonos pay a semiannual coupon. Mexico introduced a price level-adjusting unit of account called Unidad de Inversión (UDI). Cetes are issued in auctions on a weekly basis. The BPA 182 interest rate has two components: a market rate (six-month Cetes). but agency bonds. previously. They refinance the institute’s financial needs and improve the terms and conditions of its financial obligations. An UDI is a unit of account of real constant value.000 450. they were also issued at a one-year tenor. Savings protection bonds with a biannual interest payment and protection against inflation (BPA182): These seven-year. 5-. floating-rate bonds are issued by the Institute for the Protection of Bank Savings (IPAB). The reference rate is one-month Cetes. For the purpose of placement. These are not government bonds. The 3. BPATs pay interest on a quarterly basis. The reference rate is the three-month Cetes. the government issues 3-. and amortization.000 300. The first issuance came in 2000. 20-. These bonds were issued for the first time in 2003. which is calculated and published by Banxico in the Official Gazette. Cetes were issued for the first time in 1978 and constitute the oldest instrument in the local debt market. BPAs are auctioned on a weekly basis. Federal government development bonds (Bondes D): These floating-rate bonds were issued by the federal government for the first time in 2006. Chart 23. and 30-year bonds.000 Jan-08 May -08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov -10 Source: Banxico Foreign residents Bonds Federal treasury certificates (Cetes): These are zerocoupon bonds issued by the federal government. 20-. That is. and the interest rate period must be the same as for those Cetes issued at primary auction at the beginning of each period. BPTs are auctioned on a weekly basis. this eliminates any possibility of a negative real interest rate.and five-year tenors. Bondes D are issued in auctions every two weeks in three. Maturities range between one month and one year.Emerging Markets Mexico March 2011 abc on the corresponding settlement date.000 400.and 5-year MBonos are auctioned every four weeks and the 10-. and 30-year Udibonos every four weeks. a 7-year bond was issued. UDI values can be found on Banxico’s Web site.000 350. In 1995. Federal government development bonds denominated in inflation-indexed investment units (Udibonos): These inflation-linked bonds issued by the federal government are denominated in indexed investment units (UDIs). Bondes D pay coupon every 28 days at the overnight effective rate. They are issued at a three-year tenor. Savings protection bonds (BPAs): Floating-rate bonds issued by the Institute for the Protection of Bank Savings (IPAB). these also are called IPABONOS. The value of the UDI changes every day and is calculated based on information from the previous two weeks.000 250. 10-.000 200. Currently. compounded daily during the interest rate period. Savings protection bonds with quarterly interest payment (BPATs): These five-year floating-rate bonds are issued by the Institute for the Protection of Bank Savings (IPAB). interest payments. Udibonos are converted to domestic currency at the value of the UDI 37 . BPAs pay interest on a 28-day basis. and an option that protects the holder against inflation. These periods are the same as those of one-month Cetes issued at primary auction at the beginning of each period. but it was discontinued in 2007. Udibonos were developed in 1996 to protect holders from unexpected changes in the inflation rate. The interest rate period starts on the BPAs issuing date. Previously. The government issues 3-.
7-. the buyer of the swaption can choose the tenor. the 28-day TIIE rate paid on each coupon date is fixed on the previous coupon date. The UDI notional is converted to MXN at the corresponding UDI fixing. and tax issues Regulation Mexico allows for the free flow of capital across its borders. Tenors go from three months up to 30 years. At the end of the contract. and 10year TIIE. through Indeval. The UDI fixed coupon leg is payable every 182 days based on an UDI notional amount. settlement. 5-. On the floating leg. The option length extends from one month to five years. Swaps are effective T+1. This is the most liquid fixed-income derivative traded in the local market. or Euroclear or Clearstream abroad. a specific contract may need to be closed in addition to the general one. Similar to the TIIE-LIBOR swap. 15-. Regarding custody. and 20-years are listed. 3-. Another variant.Emerging Markets Mexico March 2011 abc corresponding UDI fixing as of the payment date. offshore investors can decide for local custody. 4-. The notional and maturity are agreed between parties. but decent liquidity is found up to the 10-year tenor. This is an offshore swap that consists of a fixed coupon denominated in UDI that is exchanged against a floating coupon denominated in six-month USD Libor. 38 . Payments are exchanged every 28 days. Notionals are fixed at the spot FX rate and are exchanged twice during the contract. 2-. where the fixed-rate leg of the coupon is based on the UDI and the floating leg is based on the 28-day TIIE. 2-. Coupon payments dates are on an actual/360 day-count basis. principal amounts are exchanged. but payments on the floating TIIE leg are every 28 days based on an MXN notional amount. alongside 1-. but liquidity can be found up to two years. The reference rate is the rate of return on Cetes issued in a primary auction for terms of six months. at the beginning and at the maturity of the swap. The floating leg is indexed to the 28-day TIIE rate. and 9-months. strike rate. Tenors go from one year to 30 years. with the best liquidity in the 1-. Foreign investors do not face restrictions to trade government bonds. is the UDI-USD LIBOR swap. 6-. The common trade size is between MXN100-200m 10-year equivalent with bid-offer spreads around 3bp. Tenors go from one month to 20 years. Derivatives trading is regulated by the International Swaps and Derivatives Association (ISDA). Foreign investors are required to sign a general contract in accordance with ISDA regulation when transacting derivatives. which is recognized by the US Securities and Exchange Commission (SEC). Coupon payments are determined at the maximum between the percentage increase in the value of the UDI over the interest period and the reference rate and a spread over six-month Cetes. 5-. the notional is fixed at the spot FX rate and is exchanged twice: at the beginning and at the maturity of the swap. Swaptions (TIIE swaptions): These are European options on TIIE swaps. and length of the option period. Cross-currency basis swap (TIIE-USD Libor swap): This a floating versus floating swap (basis swap) denominated in two different currencies (MXN and USD). depending on the type of derivative (forward. Inflation linked-interest rate swaps (UDI-TIIE swaps): This is an interest rate swap traded OTC. but 3-. The first TIIE rate used is the T+0 rate. One leg is MXN-denominated and pays 28-day TIIE. and for an upfront premium. Thus. 10-. Tenors go from six months to 30 years. and the other leg is denominated in USD and pays one-month Libor rate plus a basis swap spread. swaps. Moreover. and the UDI fixed-coupon leg is converted to MXN at the Regulatory. there are no barriers to entry or exit. Interest rate swaps (TIIE swaps): This is an over-thecounter. The floating leg “fixes” every 28 days. which is more liquid. fixed-for-floating interest rate swap. The TIIE curve extends from three months to 20 years. Coupons are paid every six months. Derivatives Fixed income derivatives consist of onshore and offshore interest rate swaps and cross-currency swaps. or options). All payments are made in MXN.
bba.mx 7am-2pm Foreign investors.gob. 5. Interest payments are subject to withholding tax.mx www.4 vol (USD50m) Useful links Table 25. Settlement through local custody.mx.org.000 DV01 3-5bp 28-day TIIE Act/360-day T+1 1:00pm www.hacienda. TIIE swaps settlement is T+1.uk/ 7am-2pm Foreign investors Onshore CCS Yes From 3 months to 30 years 3m.com.mx www.org.mx www. and 10 years USD15.consar.org.mx www.gob. Interbank Yes 1-20 years 2. 1y to 5y USD30m 10bp 28-day TIIE and 1-month Libor Act/360-day T+2 1:00pm www. USD5bn spot USD5m 100-130pips 1-month USD1m 1-month 30pips 12-month 100 pips USD13bn spot 50pips 6-month 0. the settlement is allowed for up to T+8.gob. Table 24. 6m. but only in the case of federal government bonds.5%. and 10 years USD15. the rate is 10%.cnbv. only for MBonos. HSMX02 HSMX1. however.9% withholding tax.bmv. Taxation There are no entry or exit taxes. Information sources Banco de Mexico Ministry of Finance National Statistics.banxico. Settlement is usually T+2. UDI-Libor or TIIE-Libor swaps are settled at T+2.mx www.inegi. Local residents are subject to withholding tax of 0.mx 7am-2pm Interbank 39 .org. 9m. please see HSBC’s Emerging Markets Currency Guide 2011: A guiding light.gob. HSMX2 HSMX <GO> Table 23. For those in the absence of a tax treaty.banxico. 19 January 2011.Emerging Markets Mexico March 2011 abc Foreign exchange For details on FX markets.mx HSMX01. is provided by delivery vis-à-vis payment. Mexico: Interest-rate swap (IRS) and cross-currency swap (CCS) markets Onshore IRS Non-resident access Tenors Liquid tenors Average trade size Bid/offer spreads under normal conditions (bp) Fixing rate Day count Effective date Fixing time (local time) Fixing page Local market hours Main participants Source: HSBC Offshore IRS Yes 1-20 years 2. 5. Interest payments to foreign residents in tax treaty countries registered with the finance ministry are subject to a 4. Derivatives and corporate debt are subject to withholding tax. Normal market conditions Onshore average daily volume Onshore spot transaction Onshore bid/ask spread Onshore forward transaction Onshore forward spread Offshore average daily volume Offshore bid/ask spread Implied option volatility spread Source: HSBC Settlement Mexican government bonds trade both OTC and thought the Mexican Stock Exchange.banxico. www. Geography and Informatics Institute Mexican Stock Exchange Banking and Securities Commission Savings for Retirement Commission Reuters Fixing page Bloomberg Fixing page HSBC Mexico Web page Source: HSBC www. foreign residents can be exempt if there is an agreement to avoid double taxation between both countries. but UDI-TIIE.000 DV01 3-5bp 28-day TIIE Act/360-day T+1 1:00pm www.banxico.org. Indeval.
individuals. 10. foreign real money funds and foreign real money funds and hedge funds hedge funds Not restricted Local or Euroclear Withholding tax 0. 26x1: MXN50. 130x1 .Emerging Markets Mexico March 2011 abc Table 26.5%. 9m. but foreign investors are exempted when there is a tax treaty Exempted when there is a tax treaty No Not restricted Local or Euroclear Withholding tax 0. 3m.5%.13x1: MXN100. floating 28d TIIE 28 days Bullet Actual/360 N/A N/A N/A N/A N/A N/A Currency Form Minimum denomination MXN10 Tenors 1m. and 1 years 3 and 5 years 3. and 30 years Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Zero coupon Zero Bullet Actual/360 MXN552bn Multiple rate allocation MXN16bn weekly Weekly (1year tenor every 4 weeks) Banks. 5. foreign real money funds and hedge funds. local funds.5%. and 30 years 3. 2y. local funds.9% if there is a tax treaty. local funds. 20. 4y.2k dv01 400-600k dv01 T+1 (standard TIIE settle) Local banks and funds. 39x1 . 7y. 3y.further: MXN20 3m. 12y. but foreign investors are exempted when there is a tax treaty Exempted when there is a tax treaty No Regulations for foreign investors Restriction on foreign Not restricted investment Custodian Local or Euroclear Interest income tax Withholding tax 0.5%. foreign accounts through local banks T+2 OTC 7am to 2pm Yield up to 2 decimal places 2-4bp MXN100m MXN7-11bn Usually T+2 Local/Euroclear Local banks and funds. individuals. 6m. individuals. foreign accounts through local banks T+2 OTC OTC 7am to 2pm 7am to 2pm Yield up to 2 decimal places 2-4bp 2-4 up to 50k 4-6 for larger MXN50m MXN2-4bn Usually T+2 Local/Euroclear Local banks and funds. 6m. 10. 10y. foreign accounts through local banks T+2 OTC 7am to 2pm Spread over reference 2-4bp MXN100m Fixed rate Semiannual Bullet Actual/360 MXN1552bn Single rate MXN4. foreign accounts through local banks T+2 OTC 7am to 2pm Yield up to 2 decimal places 2-4bp Inflation-linked UDI Semiannual Bullet Actual/360 MXN525bn Single rate UDI 500m weekly Weekly (different tenors each week) Banks. Fondeo rate compounded daily 28-day coupon Bullet Actual/360 MXN425bn Multiple rate allocation MXN2. Mexico: Bonds Cetes Issuer United Mexican States (UMS) Mexican pesos (MXN) Bondes D United Mexican States (UMS) Mexican pesos (MXN) MXN100 Bonos United Mexican States (UMS) Mexican pesos (MXN) MXN100 UdiBonos United Mexican States (UMS) UDIS MXN100 TIIE swaps Interbank agreements MXN 3x1 . local funds. Local banks and funds. foreign real money funds and hedge funds .5bn weekly Weekly (different tenors each week) Banks. foreign real money funds and hedge funds Not restricted Local or Euroclear Withholding tax 0. 15y. 1y. 20y (1y = 13 payments every 28 days) Fixed coupon vs. but foreign investors are exempted when there is a tax treaty Capital gains tax Exempted when there is a tax treaty Entry/exit No Source: HSBC 40 . individuals.91x1: MXN30. No No 4. but foreign investors are exempted when there is a tax treaty Exempted when there is a tax treaty No In broker market .0bn weekly Weekly (different tenors each week) Banks. 10% if not Exempted when there is a tax treaty No MXN50m MXN7-11bn Usually T+2 Usually T+2 Local Local/Euroclear Local banks and funds. 5y.
and in relative terms. in the debt portfolio to contribute to the de-dollarization of the economy. and more than 85% of it corresponds to nominal fixed-rate bonds. Soberanos. Participation by foreign investors is high. Back in 2002. Soberanos. Chart 25. This performance includes 2009.9% due to the global financial crisis. Primary fiscal balance 6 5 4 3 2 1 0 -1 -2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: BCRP % GDP Primary Fiscal Balance 80% 60% 40% 20% 0% 2006 Ex ternal Source: Ministry of Finance 2008 Domestic 2010 41 . fixed-rate bonds. particularly in the next three years.Emerging Markets Peru March 2011 abc Peru Government will continue to focus on domestic debt issuance Local currency bonds.8% of total debt from 40% in 2004. when the economy only grew 0. The duration of domestic market debt is 9. Domestic debt totals about PEN28bn. insurance companies. Distribution of central government debt 100% Chart 24. Debt-to-GDP ratios fell from 45% in 2004 to less than 25% at the end of 2010. the highest in Latin America. The government has three goals in its debt management policy: To increase the share of local-currency. and local pension funds (AFPs) have 38%. The government extended the local yield curve from five years in 2004 to more than 30 years in 2009. To reduce debt amortization payments. The rest is distributed among local banks. and local mutual funds. Foreign investors hold 43% of Soberanos outstanding. one of the highest levels in the region. fixedrate government debt has increased to 75.7% in the past seven years. but today this is at 45%.4 years. Soberanos. To deepen local markets by consolidating domestic debt. domestic debt accounted for only 8% of total debt. are the main instruments in the domestic market Foreign participation has increased sharply in the past decade Market structure Peru’s economic growth has averaged 6. In addition.
the government has extended the yield curve to more than 30 years.05%) may apply Offshore investors’ access Foreign ownership of government bonds PEN12. The bank’s purpose is to preserve monetary stability. Fitch and Standard & Poor’s upgraded their sovereign ratings on Peru to investment grade. The BCRP intervenes in the FX market to prevent any excess volatility in the PEN FX rate by buying or selling USD. thus. repo.9m minimal market impact Bid/offer spreads under normal conditions (bp) 20bp Source: HSBC Recent developments In the past seven years. S&P said that Peru could be upgraded in 2011 due to the resilience of macro fundamentals during the global financial crisis and high economic growth rates with low inflation.5% +/-1%. They do not represent any particular interest or entity. The executive branch appoints four members. as well. The directors are appointed for terms of five years. The BCRP does not specifically target any particular USD/PEN level. Financial transactions tax (0. Recently. administer international reserves. but with special reserve Onshore nonbank investor (eg custodian) with onshore Eligible collateral for repos For CB repos No For interbank repos No Mark-to-market requirements Banks Internal requirements Insurance companies Internal requirements Pension funds Yes Mutual funds Yes Taxation: Government bonds Onshore investors Financial transactions tax Offshore investors Exempted from withholding tax and capital gains tax.3bn As % of outstanding 42. Monetary policy Monetary policy is conducted by the Central Reserve Bank of Peru (BCRP). S&P raised its outlook on Peru’s foreign currency debt to positive from stable. The board meets once per month to decide the reference policy rate. Moody’s highlighted the improvements in the debt profile to upgrade Peru to investment grade. Its functions are to regulate the money supply. The policy tool used by the BCRP is the reference rate. issue notes and coins. it lowered the target to 2% +/-1%. futures) Yes Market liquidity statistics Soberanos (LCbn) PEN140m Buying volume in a single day (USDm) with USD50.5m Buying volume in a single day (USDm) with USD0. The Peruvian economy is highly dollarized. Since 2002. Its decision and a monetary policy statement are released when markets close. In 2008. In 2007. with a local custodian and central bank’s account Subject to cap No Registration requirement Yes Access to inshore funding No Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps.88% Direct purchase Yes.Emerging Markets Peru March 2011 abc Table 27.5m minimal market impact Bid/offer spreads under normal conditions (bp) 8bp VAC (LCbn) PEN2. and report on the nation’s finances. particularly nominal fixed-rate debt. It is composed of seven members. sharp FX volatility can hurt economic activity through balance sheet effects. The BCRP board of directors is the highest institutional authority. the Peruvian government has focused on reducing vulnerability of public finances through increasing local currency-denominated debt in the debt portfolio. among them the BCRP president. the BCRP has targeted a range for annual headline inflation of the city of Lima with a target of 2. More recently. Also. The main objective of the intervention is to reduce FX volatility. or selling short-term central bank certificates of deposits linked to the FX rate. In 2009. S&P may raise its rating if Peru’s macroeconomic policies remain in place following the presidential election in April. Peru: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Yes Onshore interbank Yes Offshore investors with onshore Yes. 42 . Congress ratifies the latter and appoints the other three members. based on the improvements in the debt profile. or both. along with strong macroeconomic fundamentals. an independent entity with autonomy in its functions. Congress may remove them from office for serious misconduct.
26’s. The central bank publishes daily figures of the IRD index.or USDdenominated accounts onshore. At the time of this writing. Tenors go from 1-10 years. The curve extends up to 31 years. There are six market makers evaluated by the finance ministry on a monthly basis. Coupons are paid on a semiannual basis and are calculated on a 30/360day basis. % Sep-08 Sep-09 Sep-10 Equity Foreign assets 43 . the BCRP increased the marginal reserve requirement on PEN deposits by local and foreign investors to as high as 120% from 40%. The BCRP aims to keep the interbank interest rate close to the policy rate or reference rate through daily openmarket operations Bonds Nominal fixed-rate bonds (Soberanos): Issued by the finance ministry. Local fixed income instruments The Peruvian government. Traded volumes reach about USD1bn per month. Offshore investors can hold either PEN. this measure had already been removed for local investors. between local banks. through the finance and economy ministry. In April 2008. these are the most liquid bonds. nonresidents held 42. usually overnight. but liquidity is very poor. and the inflation-linked bonds curve goes from 1-35 years.Emerging Markets Peru March 2011 abc HSBC provides indicative prices for Peruvian domestic government debt securities via Bloomberg page HSPE. settlement. Foreign investors are more active in the long end of the curve. The primary objective has been volatility management. Distribution of local pension funds portfolio 35 30 25 20 15 10 5 0 Local Gov ernment Bonds Source: Superintendence of Banks Derivatives Cross-currency swap (PEN-LIBOR swap): This is a fixed local rate in exchange for the six-month USD Libor rate on a semiannual basis. Coupons are paid on a semiannual basis and are calculated on a 30/360-day basis. The government has enforced a marketmakers program to improve liquidity in the local market. The IRD is adjusted by the monthly CPI. Inflation-linked bonds (VAC bonds): These are PENdenominated instruments issued by the finance ministry. issues two types of PENdenominated bonds nominal fixed-rate Soberanos and inflation-linked bonds (VAC). Regulatory. Key policy rates Interbank interest rate: This short-term rate is paid for borrowing. close to USD10bn.8% of total Soberanos outstanding. The principal and coupons are adjusted by the Valor Adquisitivo Constante (VAC). Liquidity in the local market is still poor and mostly concentrated in Soberanos. Local pension funds (AFPs) are active in the long end of the curve (longer than six years) and local banks in shorter tenors.1% and banks with 9. followed by local pension funds with 39. Auctions usually take place once per month in accordance with a schedule provided by the finance ministry two business days before each auction.5%. rather to defend a specific FX rate level. The total amount outstanding of local-currency bonds is about PEN28bn. too. As of November of 2010. which is linked to the Índice de Reajuste Diario. and tax issues Regulation Trading FX has full convertibility and no restrictions. but the 120% legal reserve requirement remains in place for foreigners. Soberanos account for 92% of total local bonds outstanding. Chart 26. or IRD index. VAC is the ratio between the IRD at the payment date and the IRD at the issuance date. but the BCRP has introduced measures to contain capital inflows when strong appreciation pressures appear. such as the 20’s. There are no capital controls. and 37’s. The nominal curve extends from 1-31 years.
gob. but if the client has a local custody account. 19 January 2011. there is no need to do FX transactions each time the client trades Soberanos. Total traded volume in the NDF market is about USD400m. please see HSBC’s Emerging Markets Currency Guide 2011: A guiding light.gob.sbs. which applies at a rate of 0.gob. Table 28. Useful links Table 29. there is a fully deliverable market for locals and an NDF market for foreigners. In both cases.pe www. thus.pe HSPE <GO> 44 .inei. Government bonds are settled though the local custodian Caja de Valores (Cavali).com. Normal market conditions Onshore average daily volume Onshore spot transaction Onshore bid/ask spread Onshore forward transaction Onshore forward spread Offshore average daily volume Offshore bid/ask spread Implied option volatility spread Source: HSBC Settlement Foreign investors may have a local custodian.bcrp. bond transactions among domestic investors are subject to the financial transactions tax (ITF).mef.pe www.Emerging Markets Peru March 2011 abc Foreign exchange For details on FX markets.pe www. it is possible to hold PEN. There are two ways to trade Soberanos. GDNs are Euroclearable.0010 PEN) 2.05% over the amount of the transaction.5 vols (USD 10m) Taxation Government bonds are exempt from withholding taxes or capital income tax. there is an FX transaction.pe www. To hedge FX risk.gob. through a local custody account or through global depository notes (GDNs) of Soberanos. However. This also applies when the foreign client has a local custody account. US500m USD3m 30pips USD3m 1m 50pips USD100-150m 10pips (0.bvl. Information sources Banco Central de Reserva del Peru (BCRP) Ministry of Economy and Finance National Statistics (INEI) Stock exchange Superintendencia de Banca y Seguros HSBC Peru page Source: HSBC www.
market makers T+1 Datatec 10am to 1pm local time Yield up to 2 decimal places 20bp PEN2m PEN30m T+1 Cavali Banks.1bn Dutch PEN100m Monthly Banks. foreign investors No Local custodian not required No No No Finance ministry Peruvian sol (PEN) Scripless PEN 1.000 Up to 40 years Inflation-linked Semiannual Bullet 30/360-day basis PEN2.Emerging Markets Peru March 2011 abc Table 30: Peru: Bonds Soberanos fixed rate Issuer Currency Form Minimum denomination Tenors Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Restriction on foreign investment Custodian Interest income tax Capital gains tax Entry/exit * 30/360 in most cases Source: HSBC VAC Finance ministry Peruvian sol (PEN) Scripless PEN 1. market makers T+1 Datatec 10am to 1pm local time Yield up to 2 decimal places 10bp PEN15m PEN150m T+1 Cavali Banks. foreign investors No Local custodian not required No No No 45 .000 From 1y to 31 years Fixed Semiannual Bullet 30/360-day basis PEN26bn Dutch PEN250-300m Monthly Banks. AFPs. AFPs.
or 40. The government has committed to continue with debt de-dollarization. 58% is US dollardenominated. or 58. the government has been committed to a policy of accumulating liquid assets equivalent to the next 12 months of payments.8bn. when it reached 75%.7bn. High debt relative to GDP and its dollarized profile stand as the main reasons for Uruguay’s not achieving investment-grade status yet.5% of debt matures in the next five years.Emerging Markets Uruguay March 2011 abc Uruguay Global UI (inflation-linked) securities are the most popular instrument among foreign investors The government has been increasing the proportion of local debt to reduce the FX exposure of its liabilities Recent debt swaps improve the debt profile for the coming years Market structure Gross public debt in Uruguay as of 3Q10 totaled USD22. Total public debt by currency Chart 28. with the objective to reach a 45% share of total government debt in UYU by 2014. Now about 20. As a result of several repurchase operations. Total public debt by coupon type 4% 14% 39% 20% 55% 2% 2% 2% 80% UYU Source: Central Bank of Uruguay JPY SDR EUR USD Fixed rate Libor Multilaterals Other Source: Central Bank of Uruguay 46 . Chart 27. as well as exchange offerings. the government has improved the debt profile.6% of GDP.5% of GDP. Since 2008. Of central government debt. and central government debt – excluding central bank and local governments – amounted to USD15. in an effort to reduce market dependence to service debt. but this portion has been reduced sharply since 2006.
The aim is to achieve the highest level of competitiveness compatible with a reasonable inflation level that at times could be outside the target range for inflation.and CPI-linked (UI) securities.0 50 consensus expectation of inflation at 6. Debt profile 2500 Amortizations 2000 Monetary policy The Central Bank of Uruguay follows a monetary policy rule based on an inflation-targeting regime. we consider the current Interests 1500 1000 500 0 Source: Uruguayan central bank IV . Chart 29. Almost all off the new issuance was subscribed by local investors: 42% by local banks and 40% by pension funds.11 I. in January 2011. The exchange resulted in the extension of maturities and the issuance of USD136m of fresh financing. A project is under way to develop market makers for local debt instruments. the government has funded itself with issuance of local currency instruments in the domestic market in 2010. and that the level of interest rates should be compatible with those targets. Yet the government’s implicit objective is the real exchange rate.Emerging Markets Uruguay March 2011 abc Table 31. the government expressed objectives of further reducing the proportion of USDdenominated debt and enhancing liquidity in the domestic market.0 1. Central bank officials recognize that monetary aggregates are the ultimate target.12 IV .1 2 II. leaving it in most cases only one notch away from investment-grade status. the government seeks to increase the percentage of debt in local currency from 30% at the end of 2009 to 45% at the end of 2014. Considering the relatively small credit market in local currency and the high level of dollarization of the economy. we do not see the reference rate as the main effective instrument to anchor inflation expectations. all main rating agencies upgraded Uruguay’s sovereign debt rating.10 I.11 IV . Yes Yes N/A N/A T-bills T-bills Yes Yes Yes Yes No No N/A N/A No No Yes Yes Yes 10. to reduce foreign-exchange exposure. In 2010. mainly as part of an exchange for central bank paper. As part of this strategy.8%% y-o-y for 2011 as tolerable for the central bank. which establishes a target range between 4-6% for 2011 and uses the overnight interbank rate as its key policy instrument. the government issued USD1. market conditions allowing.1 1 II. 11 I II . rather than a local custodian.13 20 13 20 14 20 15 20 16 47 . repo.2bn in both UYU. In addition. The Budget Law for the next four years indicates that. The central bank and the Ministry of Economics and Finance are working together to allow local instruments to settle via Euroclear. 12 I II . futures) Market liquidity statistics Daily turnover (USDm) Buying volume in a single day (USDm) with minimal market impact Bid/offer spreads under normal conditions (bp) Source: HSBC Recent developments In 2010. In this sense. Uruguay: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Onshore interbank Offshore investors with onshore Onshore nonbank investor (eg custodian) with onshore Eligible collateral for repos For CB repos For interbank repos Mark-to-market requirements Banks Insurance companies Pension funds Mutual funds Taxation: Government bonds Onshore investors Offshore investors Offshore investors’ access Foreign ownership of government bonds As % of outstanding Direct purchase Subject to cap Registration requirement Access to inshore funding Access to onshore FX hedging Access to rates hedging (interest-rate swaps.
is found in the one. Being Euroclearable. They each sell nominal and inflation-linked bonds. the government also sells bonds denominated in US dollars. Local fixed income instruments In Uruguay. Tenors extend to three years. Weekly auctions are periodically preannounced. Issuance is about USD5m equivalent on average per auction.Emerging Markets Uruguay March 2011 abc Central bank notes in UI. in which d represents the day. Tenors usually go from one to two years. These notes have fixed-rate coupons and are issued in tenors that from one to five years. the Global UI bonds are inflation-linked securities in local currency. These instruments benefit from the fact that no local requirement applies to foreign investors. Treasury notes and bonds in UI: Fixed-rate bonds are issued by the central government in UI.M-1 ((IPCM-2)/(IPCM-3))^(d+DM-1 -5/DM-1) for every 1<d<5 UId. and DM the number of days of month M: UId. including the central bank. The monetary policy rate (TPM) works as a target for the TMM so that the interbank rate does not deviate more than 50bp from the target on a daily basis.M ((IPCM-1)/(IPCM-2))^(d-5/DM) for every 6<d<31 Central bank monetary regulatory notes (letras de regulación monetaria): These are zero-coupon bonds issued both in UYU and in UI. The total amount outstanding is about USD1. Settlement takes place over the counter (OTC). Tenor: Long-term. The central government issues bonds locally and abroad. Amortization: Bullet at maturity. USD local debt Key policy rates Interbank interest rate: The average market interest rate (TMM) is derived from overnight interbank operations. Tenor may vary. Bonds Inflation-linked bonds Unidad Indexada (UI) is a daily index based on the consumer price index published by the national statistic bureau (INE) on a monthly basis. The index is based at 1 on June 2002 and varies on a daily basis according to the following formula.M= UI5. M the month. Issuance is about USD60m per week. which is usually thin.9bn. both the government and the central bank issue bonds. Though payments of interest and principal occur in USD. Weekly auctions that are periodically preannounced. yet most of the liquidity. 48 . The central bank sells bonds only locally.or two-year tenor.00% on the principal amount outstanding of the bonds as adjusted to reflect Uruguayan inflation from the issue date through the relevant interest payment date. Global UI bonds: These instruments were issued in the international market and belong to the external debt category. current maturities between 2018 and 2036. both are mainly shorter than two years. and in international markets it sells global and inflation-linked bonds. Locally. they trade at a significant premium with respect to similar local instruments. Derivatives Cross-currency swap exists for UYU/USD Libor. Tenors usually go from five to 10 years. The redemption amount is equal to the principal amount outstanding of the bonds as adjusted to reflect Uruguayan inflation from the issue date through the maturity date. Interest: Semiannual payments are payable at an annual rate of 5.M= UI5. These bonds are generally liquid. HSBC provides indicative prices for Uruguay’s domestic government debt securities via Bloomberg page HSUY. Fixed-rate treasury bonds in USD: These are bonds issued locally by the central government and denominated in USD.
There are no capital controls regarding foreign portfolio investments. please see HSBC’s Emerging Markets Currency Guide 2011: A guiding light.mef.3m 5pips USD1. Table 32.uy www.uy www.bevsa. a project is under way to allow foreign investors to access the local market via banks and brokers and settle them via Euroclear. Custody of local securities.bvm. is concentrated by the central bank.com. USD20m USD0. As mentioned above.uy HSUY <GO> Taxation There is no taxation related to local debt securities traded by foreign investors.gub.gub.uy www. both in UYU and USD.com. 19 January 2011. and tax issues Regulation Foreign investors need to appoint a local custodian to settle local debt securities.ine. www.uy www. 49 . but parties can also agree on T+1 or T+2. Normal market conditions Onshore average daily volume Onshore spot transaction Onshore bid/ask spread Onshore forward transaction Onshore forward spread Source: HSBC Regulatory.0m 5pips Useful links Table 33.bcu. Information sources Banco Central de Uruguay (BCU) Ministry of Economy and Finance National Statistics (INE) Montevideo Stock exchange Electronic Stock Exchange HSBC page Source: HSBC Settlement Settlement can take place over the counter (OTC).Emerging Markets Uruguay March 2011 abc Foreign exchange For details on FX markets. settlement. via the Montevideo stock exchange (BVM) or the electronic exchange (BEVSA).gub. Settlement is typically done on a T+0 basis. Yet some private institutions are starting to offer custody services to investors.
T+2 Euroclear BEVSA/BVM/BCU Local and foreign pension funds. local Banks. T+1. final custody on BCU No No No Regulations for foreign investors Custodian Local custodian required. and companies. 2030. brokerage houses and foreign investors Euroclear No No No Local custodian required. T+1. insurance companies.1mn) UYU5m (USD260k) T+0. 2037 Coupon Semiannual Bullet or amortizing (1/3 per year in last 3 years) 360 UYU3. final custody on BCU No No No 50 . local banks. insurance insurance companies. local banks.01 1 month to 9 years Coupon Semiannual Bullet or amortizing (1/3 per year in last 3 years) 360 USD850m No schedule N/A N/A N/A N/A OTC/BVM/BEVSA 10. and foreign investors Global CPI linked Finance ministry CPI-linked (traded in USD) Scripless UYU1 2018.8 No schedule N/A N/A N/A N/A OTC/BVM/BEVSA Global Yield up to two decimal 1bp USD1m Local USD Finance ministry USD Scripless/physical USD0.3bn Dutch single price UI250m 3 times a week Local banks T+1 OTC/BVM/BEVSA 10. and brokerage houses Treasury notes in UYU Finance ministry UYU Scripless UYU1 3-8years Coupon Semiannual Bullet 360 UYU11bn No schedule N/A N/A N/A N/A OTC/BVM/BEVSA 10. T+2 BEVSA/BVM/BCU Pension funds.00 Yield up to two decimal places//Prices 5bp//5pips UYU20m (USD1.00 Price 10pips USD100k USD500k T+3 T+0. T+2 BEVSA/BVM/BCU Pension funds. brokerage houses. brokerage houses.00-17. 2027.00 Yield up to two decimal places 5-10bp UI5m (USD50k) UI10m (USD1m) T+0. local banks. final custody on BCU Interest income tax No Capital gains tax No Entry/exit No * 30/360 in most cases Source: HSBC Local custodian required.00-17. Pension funds. T+1. insurance companies.00-17.Emerging Markets Uruguay March 2011 abc Table 34: Uruguay: Bonds Treasury notes in UI Issuer Currency Form Minimum denomination Tenors Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Finance ministry Inflation-linked Scripless UI1 From one month up to 15 years Coupon Semiannual Bullet or amortizing (1/3 per year in last 3 years) 360 USD2.
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and he is a Ph. gordian. including a position at the Mexican central bank. candidate in economics from Birkbeck College. Peru.com +1 212 525 2593 Gordian Kemen is the chief strategist for HSBC’s Latin American fixed income strategy team.hsbc. he was a financial markets analyst.Pablo Goldberg Head of Global EM Research HSBC Securities (USA) Inc.com +1 212 525 8729 Pablo A.kemen@us. focusing on the Latin American region. He holds a graduate degree in economics from the University of Konstanz. He joined the firm in 2008 as head of Latin American fixed income research. He joined the firm in May 2009. Hernan Yellati Latam FI Strategist HSBC Securities (USA) Inc.martinezcr@hsbc. Before joining HSBC. a German business school. Hernan received a master’s degree in economics from Pompeu Fabra University. Previously. and he was a lecturer and researcher in finance at the University of Mannheim. he had roles in emerging-market research at two major investment banks in London and New York.mx +52 55 5721 2380 Alejandro Martinez-Cruz joined HSBC Mexico in 2007 as as member of the fixed income strategy team. Alejandro Martinez-Cruz Latam FI Strategist HSBC Mexico S. Gordian Kemen Chief Strategist. Previously.hsbc.com. .x. Pablo is responsible for working across asset classes to build opportunities for HSBC’s emerging markets franchise with research strategy ideas across regions. Germany.yellati@us.A. Goldberg is global head of HSBC emerging markets research.goldberg@us. Latam FI HSBC Securities (USA) Inc. and has conducted postgraduate research in finance at the University of Mannheim. Pablo has a master’s degree in economics from the London School of Economics. alejandro.com +1 212 525 3084 Hernan Yellati is a member of the HSBC fixed income strategy team.a. and since 2009 has focused on strategies and trade recommendations in fixed income markets in Mexico. pablo.D. hernan. and Central America. he held similar positions at other international investment banks for about 15 years. He joined HSBC Argentina in 2003 as deputy chief economist and moved to the New York office in 2008. He received a master’s degree in economics from the University of Rochester in the US. Prior to joining HSBC. University of London.m.hsbc.