VZCZCXRO3729
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #6187/01 3511439
ZNR UUUUU ZZH
P 171439Z DEC 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9928
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 MEXICO 006187 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD 
USDOC FOR ITA (ISRALY ECHEGARAY) 
TREASURY FOR IA (ALICE FAIBISHENKO, ANNA JEWEL) 
TREASURY FOR OCC/IBF (SUSAN QUILL) 
TREASURY FOR IBSMO (WILBUR MONROE, BILL FOSTER) 
CFTC FOR OIA (WARREN GORLICK) 
NSC FOR RICHARD MILES, DAN FISK 
EXIM FOR MICHELE WILKINS 
SEC FOR OIA (SHAUNA STEELE) 
STATE PASS TO USTR (EISSENSTAT/MELLE/SHIGETOMI) 
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO/ANN MISBACK) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: PRIVATE SECTOR OFFICIALS COMMENT ON CHALLENGES 
FACING MEXICO'S SECURITIES REGIME 
 
REF: MEXICO 5858 
 
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Summary 
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¶1. (SBU) Mexico has made great strides in strengthening its 
securities regime over the past several years, but additional 
work is needed to develop these markets.  Conversations with 
local experts show that the following issues hold back 
growth:  restrictions on institutional investors; an 
inefficient repurchase agreement market; a lack of an "equity 
culture;" lackluster leadership at the stock exchange; 
lagging financial expertise; high fees; poor enforcement 
capabilities; and a slow judicial system.  Addressing these 
issues would not only directly benefit these markets, it also 
would help boost economic growth and create much needed 
employment.  End Summary. 
 
--------------------------------------------- ---- 
Securities Regime Has Improved in Recent Years... 
--------------------------------------------- ---- 
 
¶2. (U) Mexico has made great strides in strengthening its 
securities regime over the past several years.  The most 
important recent advancement is the 2005 Securities Market 
Law, which further expanded the National Banking and 
Securities Commission's (CNBV) authority, improved the 
corporate governance of publicly listed companies, increased 
the rights of minority shareholders, and created two new 
corporate vehicles, which were designed to facilitate the 
ability of small- and medium-sized companies (SMEs) to raise 
capital and transition to public listed company status.  This 
law brought Mexico's regulatory framework largely in line 
with international standards. 
 
¶3. (U) Mexico's stock exchange -- the region's largest after 
Brazil's -- has posted steep gains since 2003.  The 47% yield 
on the primary equity market index (IPC for its Spanish 
acronym) last year made it the twelfth top performing index 
among the world's largest 50 markets, and ninth among the 23 
leading emerging markets.  Moreover, the corporate debt 
market is growing quickly.  The market is deep and the tenure 
is long -- in part due to the participation of pension fund 
administrators (Afores).  The longest tenure is 30 years at a 
fixed rate, though most companies have access to 3 to 5-year 
financing. 
 
------------------------------------------- 
... But Outstanding Issues Hold Back Growth 
------------------------------------------- 
 
¶4. (U) Despite these successes, significant weaknesses 
remain.  The stock market is small, illiquid, and not a major 
source of financing for most firms.  Companies remain wary of 
listing on the stock exchange, and larger Mexican firms often 
prefer to list on international exchanges.  This usually 
takes the form of cross listing in the U.S. market through 
American Depositary Receipts (ADRs).  The number of listed 
companies has fallen from 193 in 1996, to 177 in 2000, and to 
132 in mid-December 2007.  Daily trading remains highly 
concentrated in a small number of issuers.  The six most 
heavily traded stocks -- America Movil, Wal-Mart de Mexico, 
America Telecom, Telmex, Cemex, and Grupo Televisa -- 
accounted for 64% of trading last year.  Moreover, the top 
ten companies represented 77% of market capitalization in 
¶2006. 
 
¶5. (U) Conversations with local experts show that Mexico must 
 
MEXICO 00006187  002 OF 004 
 
 
address the following issues to strengthen its securities 
markets. 
 
Restrictions that Limit Market Depth 
------------------------------------ 
¶6. (SBU) Restrictions on institutional investors impede the 
development of Mexico's securities regime.  A debt and 
derivatives expert at Merrill Lynch Mexico told econoff and 
visiting Treasury officials that the playing field needs to 
be leveled among institutional investors.  He said that 
pension fund investment regimes are fairly developed, while 
mutual funds are starting to grow and insurance funds are 
underdeveloped.  Meanwhile, investment restrictions create 
artificial liquidity barriers.  Insurance funds are extremely 
limited by investment restrictions.  Afores lack instruments 
to invest in, investment methodology, and training for 
employees.  An equity markets expert at Accival added that 
Afores can invest in Mexico's version of real estate 
investment trusts (Fibras) and a special corporate vehicle 
called an Investment Promotion Corporation (SAPI), but they 
cannot invest in individual company stocks, only index funds 
or exchange-traded funds.  Pension funds are limited in how 
much they can invest in equities, and foreign investments can 
only account for up to 20 percent of total assets under their 
management.  Accival believes the next step should be to 
allow pension funds to buy individual stocks. 
 
¶7. (SBU) An investment banking executive at Goldman Sachs 
said the Mexican authorities need to develop the repurchase 
agreement (repo) market, which is inefficient, and allow 
institutional investors to short securities and purchase 
credit default swaps (CDS) for hedging purposes.  He said 
that investors will be more comfortable holding long 
positions if they can short.  Merrill noted that the Bank of 
Mexico (BOM) last year allowed banks to participate in the 
CDS market, but regulated institutional investors still 
cannot trade derivatives.  This limits the latter's ability 
to hedge.  The official from Goldman added that institutional 
investors own mostly government securities and, therefore, 
need more options to diversify.  Moreover, pension, 
insurance, and mutual funds have large debt exposures and 
liquidity problems, making it difficult for them to manage 
risk.  He said that while banks can buy credit derivatives, 
regulators deter purchases through heavy restrictions. 
Merrill told econoff and the Treasury officials that the BOM 
is working on allowing institutional investors access to the 
CDS market. 
 
¶8. (SBU) Separately, unlike in Brazil, the large state-run 
oil and utility companies are not publicly traded.  Listing 
these companies would add much needed depth to the market. 
Government officials in thQast proposed allowing Pemex to 
issue pseudo-shares giving the bearer a claim on Pemex 
profits, but some legislators opposed the idea. 
 
Lackluster Government Authorities 
--------------------------------- 
¶9. (SBU) Two of the local experts criticized Mexican Stock 
Exchange (BMV) authorities.  One remarked that Guillermo 
Prieto, the President of the BMV, has been in his position 
for eight years and is more concerned with his future in 
politics than with growing the stock exchange.  The brokerage 
houses do not necessarily trust what BMV officials tell 
investors, and therefore, there is a limited level of trust 
and weak communication.  The official believes that the BMV 
leadership operates to enforce the law, rather than to 
promote advancements, which has resulted in a dearth of IPOs. 
 Another official said that the owners of the BMV want 
complete control over the exchange, adding that this is 
 
MEXICO 00006187  003 OF 004 
 
 
driving the exchange into irrelevance. 
 
¶10. (SBU) One of the officials remarked that while the BOM is 
very good, it is too risk averse.  The shock from the 1994 
Peso Crisis still has a strong impact on the organization's 
philosophy.  He believes the BOM is not modernizing the 
financial markets fast enough. 
 
Insufficient Financial Expertise 
-------------------------------- 
¶11. (SBU) Mexico lags significantly behind the U.S. and 
Brazil with regards to the level of education and training of 
its financial professionals.  Fund managers often lack the 
skills needed to operate in a sophisticated market.  Accival 
stated that there are only 46 chartered financial analysts 
(CFAs) in Mexico, compared to twice that in Brazil. 
 
Lack of Equity Culture 
---------------------- 
¶12. (SBU) The lack of an "equity culture" in Mexico was also 
cited as an impediment to the stock exchange's development. 
Accival said that Mexican entrepreneurs are "afraid of 
lQing."  They are reluctant to lose control of family-run 
businesses, and consider the costs to be much higher than the 
benefits. 
 
¶13. (SBU) Accival believes Mexican authorities need to do 
more to educate SMEs about the benefits of equity markets and 
globalization.  He said the average Mexican believes that 
only the rich benefit from the equity market, but this is not 
true given that equity markets have had a positive real 
return in recent years -- something that was not the case as 
recently as five years ago. 
 
Fee Structure 
------------- 
¶14. (SBU) A series of fees also affect financial sector 
development.  The official from Merrill remarked that the 
deposit insurance fund (Institute for the Protection of Bank 
Savings, IPAB) fee needs to be reduced.  He said the 
government collects an annual fee of 40 basis points on 
deposits and securities that are issued.  This creates 
distortions in the market, but the government has little 
incentive to remove this tax since it is a big revenue 
generator.  Merrill added that fees to issue debt and equity 
are also high.  While underwriting fees are low relative to 
the U.S., registration fees from the National Banking and 
Securities Commission (CNBV) and listing fees from the BMV 
are high. 
 
Enforcement and Legal Issues 
---------------------------- 
¶15. (SBU) While a senior CNBV official has remarked in 
private that the government's enforcement capabilities need 
to be improved through increased resources and training, the 
official from Merrill said that Mexico is "in a good place" 
on this issue.  He does not see the need to go in the 
direction of the U.S. with Sarbanes-Oxley.  He added, 
however, that Mexico's legal system "is a mess."  Judges are 
corrupt, the judicial process is very slow, and there is a 
lack of transparency and professionalism. 
 
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Comment 
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¶16. (SBU) While recent improvements should not be overlooked, 
Mexico's securities regime has a long way to go before it 
corresponds to the economy's size and potential.  Work needs 
 
MEXICO 00006187  004 OF 004 
 
 
to be done to improve efficiency, encourage the participation 
of smaller firms, develop products for more aggressive 
investors, etc.  Hopefully, an eventual IPO of the stock 
exchange will help Mexico address some of these issues. 
 
¶17. (SBU) The discussions with local experts highlighted the 
importance of economic reform, competition and educational 
reform in particular.  The exchange is undoubtedly held back 
by the prevalence of large monopolies and oligopolies, the 
owners of which retain significant political and economic 
influence in Mexico.  Moreover, a solid educational system is 
needed if the average Mexican is going to be able to take 
advantage of opportunities that arise from an improved 
securities regime.  In this context, it is important to 
stress basic financial literacy and the development of 
sophisticated financial expertise. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity and the North American 
Partnership Blog at http://www.intelink.gov/communities/state/nap / 
BASSETT