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Typical types of transactions
Other than transactions between dealers, what are the most typical types of over-the-counter (OTC) equity derivatives transactions and what are the common uses of these transactions?
Although OTC equity derivatives are not as common as debt derivatives, the most typical types are forwards, options and swaps. In most cases, the issuer or a person affiliated to the issuer is a party to the transaction. Generally, the purpose of the transactions is to repurchase those shares, obtain an economic result similar to the repurchase of the shares or leverage large shareholdings.
Borrowing and selling shares
May market participants borrow shares and sell them short in the local market? If so, what rules govern short selling?
Yes, although there are restrictions on short selling. The Broker Dealer Rules define short sales as those sale transactions where the seller would deliver a security that it has obtained from a securities loan. Naked short selling is not permitted under Mexican law. The Broker Dealer Rules require that Mexican broker dealers must verify that securities of the same issuer, series and characteristics are available in the market. In other words, short sale transactions may only be carried out if the securities to be delivered have been previously borrowed by the seller. It is not sufficient that the broker has identified a lender. All short sale transactions must be carried out through a stock exchange.
The short selling rules apply to shares or securities representing shares listed in the Mexican stock exchange, Bolsa Mexicana de Valores, S.A.B. de C.V. (BMV), and considered of high and medium trading volume. The BMV regularly publishes the list of such securities.
Short sales are permitted only with physical sales. Economic shorts would therefore not be restricted.
Short selling is permitted if securities have been borrowed in accordance with regulations issued by Banco de Mexico and the Securities Market Law. Securities lending regulations in Mexico are aimed at regulating securities lending activities involving Mexican or non-Mexican securities where the lender, borrower or intermediary is a bank, broker-dealer, pension fund or investment fund. Only Mexican banks and broker dealers may participate in securities lending transactions in their capacity as lenders, borrowers or intermediaries in Mexico. According to Securities Lending Rules, a Mexican bank or broker-dealer may participate in a securities lending transaction on account of a third party by acting as intermediary in the transaction. In this case, the regulations require that the client instruct or mandate the bank or the broker-dealer so that, on behalf of the client, the bank or dealer may participate as lender, borrower or both in the securities lending transaction. The client has no obligation to follow the rules, but the Mexican bank and broker-dealer acting as intermediary must comply with the rules. It is irrelevant if the client is Mexican or foreign.
Applicable laws and regulations for dealers
Describe the primary laws and regulations surrounding OTC equity derivatives transactions between dealers. What regulatory authorities are primarily responsible for administering those rules?
The primary laws governing OTC equity derivatives transactions are:
- the Banking Law;
- the Securities Market Law;
- the Commercial Insolvency Law;
- the Insurance Companies Law; and
- the Pension Funds Law.
The primary regulations governing OTC equity derivatives are:
- Circular 4/2012 issued by Banco de Mexico, Mexico’s central bank, governing derivative transactions entered into by Mexican banks, broker-dealers, investment funds, nonbanks, general deposit warehouses and certain government-owned entities;
- the General Rules for Insurance Companies issued by the National Insurance and Bonding Commission (CNSF) governing derivatives transactions entered by insurance companies;
- Circular 6/2013 issued by Banco de Mexico and other regulations issued by the National Commission for the Systems for Savings (Consar) governing derivatives transactions entered into by pension funds;
- the Issuers Regulations; the Broker Dealer Rules; and
- the Securities Lending Rules.
The main regulators of OTC equity derivatives are Banco de Mexico, the National Banking and Securities Commission (CNBV), Consar and the CNSF.
In addition to dealers, what types of entities may enter into OTC equity derivatives transactions?
Any person can enter into an OTC equity derivative as a client. Financial entities must follow the provisions of the regulations described in question 3. Mexican banks may enter into OTC equity derivatives related to shares, groups or baskets of shares, securities linked to shares, in all cases listed on a stock market and indices of shares listed on a stock market. Broker-dealers may not enter into physically settled OTC equity derivatives. Pension funds may only enter into OTC equity derivatives shares, groups of shares and certificates representing shares listed on stock exchange markets of ‘eligible countries’. Eligible countries are countries that are:
- members of the Committee on Payments and Settlement Systems of the Bank for International Settlements (Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Luxembourg, Mexico, the Netherlands, Singapore, South Korea, Spain, Sweden, Switzerland, the UK and the US);
- members of the Pacific Alliance with full membership rights with stock exchanges that belong to the Integrated Latina America Market;
- member states of the EU; and
- member countries of the Organisation of Economic Co-operation and Development (OECD), which have free trade agreements with Mexico.
Mexican insurance companies can enter into certain types of OTC equity derivatives transactions (options forwards or swaps) to the extent that such transactions are necessary for hedging purposes.
Applicable laws and regulations for eligible counterparties
Describe the primary laws and regulations surrounding OTC equity derivatives transactions between a dealer and an eligible counterparty that is not the issuer of the underlying shares or an affiliate of the issuer? What regulatory authorities are primarily responsible for administering those rules?
The laws and rules applicable to OTC equity derivatives transactions entered between any dealer and an eligible counterparty that is not the issuer or an affiliated are the Securities Market Law and Circular 4/2012. Although such regulation applies to dealers, all transactions with clients must comply with such requirements. OTC equity derivatives transactions must be entered into pursuant to master agreements that must follow the principles of the International Swaps and Derivatives Association (ISDA) Master Agreement (which may be governed by Mexican, English or New York law). Any agreement that follows the principles of ISDA in respect of early termination and netting is acceptable. Listed derivatives transactions may be entered into the Mexican derivatives market (MexDer), derivatives exchanges established in member states of the EU, the OECD or the technical committee of the International Organization of Securities Commissions (hereinafter, the Recognised Exchanges).
Securities registration issues
Do securities registration issues arise if the issuer of the underlying shares or an affiliate of the issuer sells the issuer’s shares via an OTC equity derivative?
Yes, to the extent that the OTC equity derivative is physically settled and the securities are offered to the public.
May issuers repurchase their shares directly or via a derivative?
The general rules regarding purchase of securities included in the Securities Market Law and in the Issuers Regulations are applicable to the OTC equity derivatives. Outlined below are the derivatives transactions that may be entered into by an issuer or their affiliates in cases where the underlying assets are the shares issued by such issuer and the transactions are physically settled. If the transactions are cash-settled, the following restrictions will not be applicable.
Repurchase of securities by an issuer
An issuer, acting like a counterparty, may enter into an OTC equity derivative when its own shares are the underlying assets if the OTC equity derivative is cash-settled.
The general rule under Mexican law is that corporations may not repurchase their own shares. As an exception, issuers may repurchase shares representing their capital stock (or securities representing such shares) if the following conditions are met:
(i) the purchase must be made through the BMV;
(ii) the purchase must be made at prevailing market prices, unless approved by the CNBV;
(iii) such repurchase should be made charging the issuer’s net worth (stockholders’ equity) or charging the issuer’s paid-in capital in the event that the issuer resolves to convert the repurchased shares into treasury shares. In the latter case, no shareholders’ resolution shall be required;
(iv) the shareholders’ meeting must approve the maximum amount that may be used for such repurchase. Such amount must not exceed the net profits of the issuer;
(v) the issuer must not be in default with respect of the payment of its obligations under securities registered with the National Registry of Securities (RNV) maintained by the CNBV; and
(vi) the purchase and sale of the shares issued by the relevant corporation should not affect the minimum percentages established by the Securities Market Law for the listing of the shares.
According to the Securities Market Law, the provisions set out above (except (i) and (ii)) are applicable regarding the purchase or sale of OTC derivatives, listed derivative instruments, warrants and structured notes that are physically settled and where the shares of the issuer are the underlying assets. In case of cash settlement, the aforementioned rules are not applicable. The same rules are applicable for the sale of repurchased shares of the issuer.
Furthermore, the Securities Market Law prohibits subsidiaries or entities under the control of an issuer to purchase shares or instruments representing such shares, issued by the relevant parent company.
The Issuer Regulations permit Mexican issuers to purchase their own shares without reducing its capital if such transactions comply with the following requirements:
- the relevant issuer must not have any outstanding cumulative dividend payments in favour of preferred stock, nor have any default with respect of any debt security;
- the repurchase needs to be made through the BMV at prevailing market prices;
- the repurchased shares must be fully paid shares, without making any distinction among the shareholders (ie, the shares could not be purchased from a pre-arranged shareholder) or any other characteristic diminishing the general conditions of the transaction;
- the issuer must notify the BMV and the CNBV, at least 10 minutes in advance of the relevant repurchase bid, for purposes of immediate public disclosure, its intention to acquire more than 1 per cent of its outstanding shares within a single trading session;
- in the event that the intended repurchase represents an amount less than 3 per cent of the issuer’s outstanding shares, whether in one transaction or a series of transactions in a 20-day term; and the sellers are not affiliates of the issuer (eg, holding entities, subsidiaries and other affiliates), no public tender offer shall be required. However, in the event that the intended repurchase represents an amount equal to, or greater than, 3 per cent of the issuer’s outstanding shares or the sellers are affiliates of the issuer (except in certain cases related to stock options plans), a public tender offer shall be made;
- the repurchase order shall be given by the officer of the issuer appointed by the board of directors as responsible for the management of the reserve account created for the repurchase of shares;
- the result of the repurchase is disclosed to the BMV;
- the issuer must disclose in their quarterly reports to the BMV all derivatives transactions related to their own shares, as well as the purpose of entering into such transactions; and
- no repurchase may be made if there is an existing tender offer or if there is inside information that has not been disclosed.
The Securities Market Law provides that persons who, directly or indirectly, participate in securities market transactions, including OTC equity transactions, may not:
- engage in market manipulation transactions, which are defined as those acts that interfere with the free offer and supply, by artificially affecting the trading volume or the price of securities, with the intent of obtaining a benefit or a benefit for a third party. It should be noted that stabilisation transactions in public offerings are not considered market manipulation;
- enter into simulated transactions. Although not defined by the Securities Market Law simulation should be understood as trying to make a transaction appear as a transaction of a different nature;
- interfere or tamper with the negotiation systems or the information systems of securities exchanges;
- enter into transactions when there is a conflict of interest;
- enter into transactions that do not comply with the market good practices; or
- order or participate in transactions for its own benefit or the benefit of third parties, with knowledge that a third party has or will enter into a transaction with respect to the same securities.
What types of risks do dealers face in the event of a bankruptcy or insolvency of the counterparty? Do any special bankruptcy or insolvency rules apply if the counterparty is the issuer or an affiliate of the issuer?
In accordance with the terms of the Commercial Insolvency Law, in case of the declaration of insolvency of a counterparty, all derivative transactions, including OTC equity transactions, will be mandatorily terminated early and netted in accordance with the terms of the relevant master agreement. The counterparty will be treated for the net lump sum as secured or secured creditor, as the case may be. The only different rule that would be applicable in cases where the counterparty is the issuer or an affiliate of the issuer is that certain resolutions adopted by the creditors of the issuers in respect of accepting a restructuring agreement will not require the vote of such affiliate in its capacity as creditor.
What types of reporting obligations does an issuer or a shareholder face when entering into an OTC equity derivatives transaction on the issuer’s shares?
The Securities Market Law provides that any person or group of persons that acquire, directly or indirectly, through or outside a stock exchange, in one or several simultaneous or successive transactions, ordinary voting shares of a corporation registered before the RNV (or securities, options or derivatives that may give right to purchase those shares) and as a result holds 10 per cent or more but less than 30 per cent of such shares (or securities, options or derivatives that may give right to purchase those shares), shall disclose such ownership by any such person or group member to the BMV. It should be noted that any person who purchases more than 30 per cent of the shares of a Mexican issuer must conduct a tender for all the shares of such issuer, unless it is authorised to conduct an offer for a lesser percentage by the CNBV. Persons ‘related to a corporation’ whose ordinary voting shares (or securities, options or derivatives that may give right to purchase those shares) are registered before the RNV who, directly or indirectly, through one or several simultaneous or successive transactions, increase or decrease by 5 per cent its participation in such capital are also subject to disclosure obligations. The relevant purchase must be notified within three business days from the acquisition of the shares or securities, options or derivatives that may give right to purchase those shares.
Persons or groups of persons that are owners, directly or indirectly, of 10 per cent or more of the ordinary shares of a corporation that have such shares registered before the RNV, as well as board members and relevant officers, are obligated to report to the CNBV acquisitions or sales related to such shares that exceed such threshold. Such persons must notify the CNBV quarterly of acquisitions or sales carried out with such securities to the extent that the total amount subject to those transactions during the corresponding period is equal to or greater than approximately US$265,000. Such notification shall be delivered within five business days following the end of the corresponding trimester. Also, such persons must inform of any single acquisition or sale carried out with such securities to the extent that the total amount subject to this specific transaction is equal to or greater than approximately US$265,000. Such notification shall be delivered within the next business day from surpassing the threshold described above.
The Securities Market Law provides that any person acquiring more than 10 per cent but less than 30 per cent of the capital stock of a Mexican listed company (or securities, options or derivatives that may give right to purchase those shares) must disclose to the market if its intention is to purchase a ‘significant influence’. In cases where the intention is to purchase more than 30 per cent, a tender offer must be conducted. As defined in the Securities Market Law, ‘significant influence’ means holding title to rights that allow, direct or indirectly, exercising the voting right in respect of at least 20 per cent of the capital stock of a corporation.
Persons that are considered to be ‘related’ to a corporation include the following:
(i) persons or a group of persons that control (as defined below) or have a significant influence (as defined below) in a corporation that forms part of the corporate group to which the issuer belongs, board members and relevant officers of such corporations;
(ii) persons who have the power to instruct (as defined above) in a corporation that belongs to the same corporate group than the issuer;
(iii) the spouse, significant other or relatives of individuals included in (i) or (ii), as well as of the partners or co-owners of such individuals;
(iv) the corporations who are part of the same corporate group as the issuer; or
(v) corporations that are controlled or are under the significant influence of any of the persons described in (i) to (iv).
A ‘group of persons’ means the persons who have agreements, of any nature, to take decisions in the same direction. Unless otherwise proved, it is presumed that the following constitutes a group of persons: the persons who are related by consanguinity, affinity or adoption within the fourth degree, spouses or significant others; and the corporations that are part of a same parent company or ‘corporate group’, as defined below, and the person or group of persons that have ‘control’ on such corporations.
‘Corporate group’ means the group of corporations organised under direct or indirect capital stock participation scheme in which the same corporation maintains ‘control’ over such companies.
‘Control’ means the capacity of a person or group of persons to:
- impose directly or indirectly its decisions in shareholders’ meetings or to appoint the majority of the board members;
- hold directly or indirectly more than 50 per cent of the voting shares of an issuer; or
- direct (directly or indirectly) the management of a corporation.
Issuers shall deliver to the CNBV, upon registration of their shares and in no event later than 30 June of each year, a report containing the name of the person or corporation, the number, series and class of the shares owned, as well as the amount and percentage represented with respect to the capital stock of such issuer, of the following persons:
(i) relevant directors and officers of the issuer having, directly or indirectly, an individual share ownership greater than 1 per cent of the issuer’s capital stock;
(ii) persons or corporations, trusts or other investment vehicles, owners or beneficiaries, directly or indirectly, of 5 per cent or more of the issuer’s capital stock. Additionally, such persons should also notify the CNBV of any completed purchase or sale transaction relating to the ordinary shares (or securities, options or derivatives that may give a right to purchase those shares) of the issuer to which they are related which exceed approximately US$300,000 in value within five days of the end of the relevant quarter; and
(iii) the 10 shareholders, either persons or corporations, having the greatest direct share ownership, even when such ownership does not represent 5 per cent of the issuer’s capital stock individually. Additionally, such persons should also notify the CNBV of any completed purchase or sale transactions relating to the ordinary shares (or securities, options or derivatives that may give a right to purchase those shares) of the issuer to which they are related that exceed approximately US$300,000 in value within five days of the end of the relevant quarter.
The report referred to in this case shall contain updated information at least as of the date on which the issuer’s general ordinary shareholders’ meeting approving the balances of the business year immediately prior, is held.
In addition, issuers shall provide a report regarding any person who owns or is the beneficiary of 1 per cent or more of the issuer’s capital stock, directly or indirectly, through one or more corporations, trusts or other investment vehicles.
Persons, corporations or investment vehicles that, as of the date on which the issuer’s general ordinary shareholders’ meeting (approving the balance of the business year immediately prior) is held, fall into the conditions referred to in points (i) and (ii) above, shall deliver to the issuer no later than 15 May of each year, the following information:
- name of the person or corporation;
- number, series and class of the shares owned, directly or indirectly; and
- the amount and percentage represented with respect to the capital stock of the issuer.
In addition, any person who owns or is the beneficiary of 1 per cent or more of the issuer’s capital stock, directly or indirectly, through one or more corporations, trusts or other investment vehicles, shall also deliver to the issuer, no later than 15 May of each year, the above-mentioned information.
Are counterparties restricted from entering into OTC equity derivatives transactions during certain periods? What other rules apply to OTC equity derivatives transactions that address insider trading?
A person with access to material non-public inside information may not enter into OTC equity derivatives transactions that have, as underlying assets, the shares of the issuer to which they are related. The Securities Market Law defines inside information as any facts, events or actions of any nature that may influence the prices of securities registered with the RNV and that have not been disclosed to the public through the relevant stock exchange. It is not necessary that the relevant person has knowledge of all inside information to be considered an insider provided that the information to which he or she has access may affect the trading price of the relevant securities.
The Securities Market Law assumes that the following persons have access to inside information with respect to an issuer of securities:
(i) board members, secretaries of the board, statutory auditors, relevant officers, attorneys-in-fact of the issuer or of corporations controlled by the issuer or of corporations that own directly or indirectly 10 per cent or more of shares of the issuer;
(ii) shareholders or persons controlling directly or indirectly 10 per cent or more of shares of the issuer;
(iii) board members, secretaries of the board, statutory auditors, relevant officers, attorneys-in-fact of corporations that provide services in connection with any event that may be considered inside information;
(iv) shareholders that own directly or indirectly 5 per cent or more of shares of listed financial institutions or financial holding companies or 10 per cent in the case of non-listed financial entities;
(v) board members, secretaries of the board, statutory auditors, relevant officers, attorneys-in-fact of the corporations listed in (iv) above;
(vi) persons who have significant influence or power to instruct in the issuer or in the corporate group of the issuer; and
(vii) those persons who enter into transactions that are significantly different than their historical trading pattern and that may have reasonably accessed inside information because they had communications with spouses, relatives or ‘significant others’ of any of the persons listed above and business partners of any of the above listed persons.
In addition, persons with inside information may not:
- enter into any transaction or instruct any transaction with securities or derivatives related to such securities, if the market prices of such securities or derivatives may be affected by the inside information;
- deliver or communicate to third parties the inside information (except to those persons who are required to be informed as result of their position or employment); or
- issue recommendations or provide advice with respect to securities or derivatives related to such securities, if the market prices of such securities or derivatives may be affected by the inside information.
Violations of these limitations could result in fines or prison penalties of up to 12 years. In addition, the counterparty of any transaction entered with an insider in possession of inside information may request the payment of an indemnity for the damages.
The aforementioned restrictions would also be applicable to transactions entered outside Mexico that have an impact in Mexico.
Short swing trading
The Securities Market Law provides that insiders may not, directly or indirectly, acquire or purchase, directly or indirectly, securities issued by the issuer in respect of which they are an insider or derivatives that have as underlying assets those shares, during a three-month period following the date on which they effected the last divestiture on any type of securities of the same issuer, and vice versa.
The above limitation is not applicable to:
- transactions entered by banks or broker-dealers with their own position;
- debt securities issued by banks;
- securities purchased in connection with an employee stock option plan;
- securities issued by mutual funds; or
- transactions that are authorised by the CNBV in connection with:
- corporate restructure;
- public offers;
- exercise of rights of first refusal;
- transactions that are entered into with the purpose of exchange shares from one series to shares of another series of the same issuer; and
- in cases where the insider requires liquidity.
The limitations described in this question also apply to transactions carried out in foreign markets.
What additional legal issues arise if a counterparty to an OTC equity derivatives transaction is the issuer of the underlying shares or an affiliate of the issuer?
See question 10.
What types of taxation issues arise in issuer OTC equity derivatives transactions and third-party OTC equity derivatives transactions?
Mexican income tax will be payable in connection with any capital gain obtained in such transactions.
Describe the liability regime related to OTC equity derivatives transactions. What transaction participants are subject to liability?
Buyers and sellers will be liable for market practices that could be considered insider trading or market manipulation, as described in questions 7 and 10. If the issuer is also a participant, the issuer will be liable for misleading or false information disclosed to the public.
Stock exchange filings
What stock exchange filings must be made in connection with OTC equity derivatives transactions?
Under the Securities Market Law it is not necessary that the OTC equity derivatives with listed securities be carried on the BMV. Clients may instruct the broker-dealer that maintains the custody of shares to transfer them to another custodian that acts on behalf of a buyer. An authorisation from the CNBV may be required for concluding such transaction.
Typical document types
What types of documents are typical in an OTC equity derivatives transaction?
OTC equity derivatives are documented in master agreements, typically the ISDA Master Agreement or the local master agreement and in confirmations. As Mexican banks and broker-dealers are not permitted to enter into long-form confirmations, such documents are only issued by other types of Mexican counterparties with foreign banks and broker-dealers.
For what types of OTC equity derivatives transactions are legal opinions typically given?
Legal opinions are typically issued when the OTC equity derivatives transactions are documented under an ISDA Master Agreement. It should be noted that such opinions are not mandatory.
May an issuer lend its shares or enter into a repurchase transaction with respect to its shares to support hedging activities by third parties in the issuer’s shares?
Yes, subject to the rules described in question 7.
What securities registration or other issues arise if a borrower pledges restricted or controlling shareholdings to secure a margin loan or a collar loan?
If the shares are listed, no registration is required. However, security interests on those shares are perfected by transferring such securities to the account of the secured party or its custodian with SD Indeval Institucion para el Deposito de Valores, S.A .de C.V., the central depository and securities clearing institute of Mexico.
If a borrower in a margin loan files for bankruptcy protection, can the lender seize and sell the pledged shares without interference from the bankruptcy court or any other creditors of the borrower? If not, what techniques are used to reduce the lender’s risk that the borrower will file for bankruptcy or to prevent the bankruptcy court from staying enforcement of the lender’s remedies?
As a general rule, under the Mexican Commercial Insolvency Law there will be a stay on the enforcement of collateral on the declaration of insolvency of a Mexican borrower. There are three main exceptions to the general rule. The first is in the case of securities pledged under a prenda bursátil agreement where the ownership of the securities has been transferred to the secured party and the parties have agreed that on a default, the secured party keeps the securities. In this case, the secured party would have to set-off the securities against the unpaid obligations. The second exception is when title of the shares is transferred to collateral trust. In this case, the collateral would no longer be part of the borrower’s estate. On a default, the trustee can sell the securities. The third exception is that in accordance with article 75 of the Commercial Insolvency Law, even in cases where the borrower has been declared insolvent, procedures to enforce the execution of a security over assets, including under a prenda bursátil agreement, may commence or continue if the competent judge overseeing the insolvency procedure, with the prior opinion from the receiver, determines that the collateral is not essential for the company to continue as an ongoing business.
What is the structure of the market for listed equity options?
Listed equity options are traded at MexDer Asigna. Compensación y Liquidación (Asigna) is the central counterparty of all trades of listed equity options. All trades must be entered through clearing members. All trades are novated and assigned to the central counterparty.
Describe the rules governing the trading of listed equity options.
Under the rules governing trading of listed derivatives, the counterparty to each futures and options contract entered into by a client is Asigna. Transactions are entered into with Asigna by each client through a clearing member that acts as the agent of the client, but is also jointly liable for the obligations of such client.
Amounts due under existing contracts between Asigna and each client, acting through a clearing member or through a broker, must be netted.
Long and short positions are kept open for settlement purposes, although Asigna may permit position limits to be exceeded by a client, if the purpose is to hedge an open long or short position.
Open or unsettled contracts between Asigna and a clearing member may be assigned to another clearing member if a clearing member is merged, excluded by MexDer or Asigna (as a result of a breach, including failure to maintain sufficient assets) or becomes mandatorily managed by Asigna, or a client so requests.
Asigna operates a settlement security system that aims to avoid systemic and counterparty risk. If a client fails to satisfy a daily settlement, the clearing member is required to apply certain contributions maintained on behalf of the defaulting client as payment. If such contributions shall be insufficient, then the clearing member shall pay amounts due to Asigna with its own funds. In the event that such assets are insufficient, Asigna is obligated to undertake the management of the clearing member, apply all remaining assets of the clearing member as payment and transfer open contracts and other contribution to other clearing members. If amounts due were to remain unpaid, then Asigna may apply the aggregate amounts maintained in the certain settlement fund. Finally, Asigna may impose extraordinary settlements on each remaining clearing member.
In connection with the foregoing, it is important to note that, as a legal matter, even though the liability of the defaulting client is unlimited (ie, up to the aggregate amount due and to the extent of such client’s assets), the joint liability of the relevant clearing member is limited to its assets (and not to the assets of the Mexican bank or Mexican broker-dealer acting as the trustee of the relevant clearing member).
Legal novation exists at MexDer and all contracts are entered into by clients, through clearing members with Asigna. MexDer will notify Asigna of any futures or options contract purchased and sold at MexDer, and Asigna becomes the seller or the purchaser of the purchasing or selling clients. Legal novation applies only to contracts purchased or sold at MexDer (and not off MexDer).
Types of transaction
What categories of equity derivatives transactions must be centrally cleared and what rules govern clearing?
There are no requirements for OTC equity derivatives transactions to be centrally cleared.
What categories of equity derivatives must be exchange-traded and what rules govern trading?
There are no requirements for certain types of equity derivatives to be exchange-traded. Futures and options of certain equities are traded on MexDer.
Describe common collateral arrangements for listed, cleared and uncleared equity derivatives transactions.
Listed equity derivatives do not require any specific collateral arrangements, other than contributions that must be made by any clients participating on MexDer.
Must counterparties exchange collateral for some categories of equity derivatives transactions?
No, there is no such requirement.
Liability and enforcement
Territorial scope of regulations
What is the territorial scope of the laws and regulations governing listed, cleared and uncleared equity derivatives transactions?
Mexican laws apply to parties who are present in Mexico or to transactions that have, as underlying asset, Mexican equity securities or securities representing those securities, including American depositary receipts.
Registration and authorisation requirements
What registration or authorisation requirements apply to market participants that deal or invest in equity derivatives, and what are the implications of registration?
Mexican banks, pension funds and broker-dealers are required to obtain a specific authorisation from Banco de Mexico, Mexico’s central bank, in order to deal or invest in equity derivatives. Such authorisation will be issued if the relevant entity has complied with 31 requirements related to risk management, trading and control, among others. Other Mexican financial entities are not authorised to enter into equity derivatives. Non-regulated entities may invest in equity derivatives but they may not deal with such products. Foreign entities may offer these products on a cross-border basis.
What reporting requirements apply to market participants that deal or invest in equity derivatives?
Mexican banks, broker-dealers and pension funds are required to file a large number of reports with Banco de Mexico with respect to the equity derivatives in which they deal or invest. Corporations with listed shares are required to disclose in their quarterly financial statements the equity derivatives they entered into where the underlying assets are their own shares. Also, all parties are subject to shareholding disclosure obligations as described above if the equity derivatives are physically settled.
What legal issues arise in the design and issuance of structured products linked to an unaffiliated third party’s shares or to a basket or index of third-party shares? What additional disclosure and other legal issues arise if the structured product is linked to a proprietary index?
If the relevant products are offered to the public, such securities must be registered with the RNV, and the CNBV must approve the public offer of securities. Such public offer must be conducted by a Mexican broker-dealer. Disclosure will require legal, financial, business, management and accounting information of the issuer, as well as of the structured product and the underlying index. Generally, a licence from the owner of the index is required.
Describe the liability regime related to the issuance of structured products.
Liability for the issuer will be no different than the issuer of shares or other securities. In other words, the issuer will be liable for misleading or false information disclosed to the public or for market practices that could be considered insider trading or market manipulation.
What registration, disclosure, tax and other legal issues arise when an issuer sells a security that is exchangeable for shares of a third party? Does it matter whether the third party is an affiliate of the issuer?
If the relevant products are offered to the public, such securities must be registered with the RNV, and the CNBV must approve the public offer of securities. Such public offer must be conducted by a Mexican broker-dealer. Disclosure will require legal, financial, business, management and accounting information of the issuer, as well as of the relevant convertible security and of the issuer of the shares into which the securities will be converted.
What registration, disclosure, tax and other legal issues arise when an issuer sells a security that is convertible for shares of the same issuer?
If the relevant products are offered to the public, such securities must be registered with the RNV, and the CNBV must approve the public offer of securities. A public offer such as this must be conducted by a Mexican broker-dealer. Disclosure will require legal, financial, business, management and accounting information of the issuer, as well as of the relevant convertible security.