These indices capture the average funding expenses incurred by major Mexican commercial banks and corporations, respectively, and are to be used as benchmarks for credit pricing, risk management, and assessing the financial system’s health. Following the approach outlined by Berndt, Duffie, and Zhu (2023), we formulate the long-term credit spread indices by amalgamating credit spreads from bonds with varying maturities issued by Mexican commercial banks.
This paper establishes the across-the-curve credit spread indices (MXAXI) tailored for the Mexican market and the Financial Condition Credit Spread Index (MXFXI), accounting for specific features of the Mexican corporate bond market. These indices capture the average funding expenses incurred by major Mexican commercial banks and corporations, respectively, and are to be used as benchmarks for credit pricing, risk management, and assessing the financial system’s health. Following the approach outlined by Berndt, Duffie, and Zhu (2023), we formulate the long-term credit spread indices by amalgamating credit spreads from bonds with varying maturities issued by Mexican commercial banks. The weights assigned to these spreads account for issuance volumes. The short-term MXAXI index is computed from a mix of short-term funding instruments used by the banking sector in Mexico; the result is compared with the spread of government bonds and the alternative TIIE-28 rate published by Banco de Mexico. This comparison is pertinent as clearing houses and dealers have been preparing to transition away from the 28-plus day TIIE, following a directive from the Mexican central bank banning its use in swap trades starting in 2025.
Mexico boasts one of the most developed bond markets in Latin America, with outstanding domestic debt securities amounting to USD $677 billion, trailing only Brazil. The country enjoys macroeconomic stability, attributable to sound public finances, disciplined monetary policy, and the robustness of banks under a modern regulatory and supervisory framework. These factors, along with improved financing conditions, have facilitated a structural transformation of the Mexican economy and its financial markets (Sidaoui and Ramos-Francia, 2008).
We identify three core benefits of using MXAXI and MXFXI in conjunction with the Overnight TIIE rate, which is endorsed by the Working Group on Alternative Reference Rates in Mexico and promoted by the Mexican Central Bank as a reference rate: (i) Banks could mitigate mismatches between lenders’ assets and liabilities during market stress by using these indices as dynamic spreads reflecting changes in banks’ cost of funds over forward-looking term periods. (ii) In commercial lending applications, such as revolving lines of credit offered by Mexican banks and other financial institutions to non-financial corporations, these indices will enable closer alignment of borrowing and lending rates, increasing the willingness to extend credit throughout the business cycle. (iii) Derivatives referencing MXAXI and MXFXI could be utilized by hedge funds to take positions on credit conditions in Mexico, thereby benefiting local credit markets.
Chief Executive Officer of SOFR Academy, Marcus Burnett, added, “I am very pleased about the publication of the Mexican AXI feasibility study, which is a very important market that continues to grow in importance, not only for the United States. I am very grateful for the leadership of Julio and José.”
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SOFR Academy, Inc. reserves all rights in the methodologies and outputs disclosed in this document, the white paper, the updates to the white paper and on SOFR Academy, Inc.’s website, and in the copyright in this document, the white paper, the updates and on SOFR Academy, Inc.’s website. SOFR Academy, Inc. holds the exclusive word-wide rights to commercialize the intellectual property (IP) associated with Across-the-Curve Credit Spread Indices (AXI)TM and the Financial Condition Credit Spread Indices (FXI),TM this includes but is not limited to literary work, the algorithm / code, all trade secrets, know-how, trademarks, designs, copyright, whether or not registered or registrable or having to undergo any other process for grant, registration or the like. None of these rights may be used without a written license from SOFR Academy, Inc. SOFR is published by the Federal Reserve Bank of New York (The New York Fed) and is used subject to The New York Fed Terms of Use for Select Rate Data. The New York Fed has no liability for your use of the data. Neither AXI nor FXI are associated with, or endorsed or sponsored by, The New York Fed. SOFR Academy is not affiliated with the New York Fed.
SOFR Academy, Inc. provides financial education and market data to empower corporations, financial institutions, governments, and individuals to make better decisions. The Firm’s panel of advisors includes academics from Tsinghua University, Harvard University, the University of California Berkeley, New York University, Oxford University and London Business School, as well as experienced financial services professionals. SOFR Academy is also driving the operationalizing of AXI and FXI as credit spread add-ons for near Risk-Free-Rates for use in lending and derivative markets. SOFR Academy is a member of the Asia Pacific Loan Market Association (APLMA), American Economic Association (AEA), the Loan Syndications and Trading Association (LSTA), the International Swaps and Derivatives Association (ISDA), the Bankers Association for Finance and Trade (BAFT) which is a wholly owned subsidiary of the American Bankers Association (ABA), and the U.S. Chamber of Commerce (USCC). For more information, please visit SOFR.org