Mexican AXI establishes 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
Today, SOFR Academy welcomed the publication of the paper “Exploring Across-the-Curve Credit Spread Indices (MXAXI) and Financial Intermediation (MXFXI) for Mexico” by Julio A. Cacho-Díaz of Rice University, and José Carlos Rodríguez Pueblita of IPADE Business School in Mexico.
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), the authors 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.
“The introduction of MXAXI and MXFXI alongside the Overnight TIIE rate offers significant advantages for Mexico’s financial system. By providing dynamic spreads that reflect shifts in banks’ funding costs, these indices help reduce mismatches during market volatility. Furthermore, they enhance the alignment of borrowing and lending rates, encouraging greater access to credit.”– Julio A. Cacho-Diaz, Rice University
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).
The authors 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.
“The transition away from LIBOR is a critical step for aligning Mexico’s financial markets with global standards. By adopting the Overnight TIIE and innovative benchmarks like the MXAXI and MXFXI indices, Mexico ensures a more transparent, replicable, and stable framework for its money and derivatives markets.”– Professor Jose Carlos, IPADE Business School
Chief Executive of SOFR Academy, Marcus Burnett, added, “I am very pleased about the publication of the MXAXI and MXFXI feasibility study. Mexico is a market that continues to grow in importance, not only for the United States. I am very grateful for the leadership of Julio and José.”
The MXAXI and MXFXI feasibility study is available for download here and relevant resources will be added over time to the Mexican AXI microsite here. The publication of the Mexican feasibility study complements studies for China, Europe and Japan. Studies for Brazil, India and South Korea are in progress. Questions, comments, and feedback are welcome and can be directed to: [email protected].
In 2022 Invesco Indexing LLC, an independent index provider owned by global asset manager Invesco Ltd (NYSE: IVZ), partnered with SOFR Academy to launch the first-of-their-kind US-dollar Across-the-Curve Credit Spread Indices (“AXI”) and US-dollar Financial Conditions Credit Spread Indices (“FXI”). These indices work in conjunction with the Secured Overnight Financing Rate (“SOFR”) and address concerns communicated by a group of American banks. This concern was that under a SOFR-only environment in times of economic stress, the return on banks’ SOFR-linked loans would decline, while banks’ unhedged costs of funds would increase, thus creating a significant mismatch between bank assets (loans) and liabilities (borrowings).
About SOFR Academy
SOFR Academy is operationalizing first of their kind across-the-curve credit spread indices in major currency jurisdictions around the world. These robustly defined credit spreads work in conjunction with near-risk free rates and were conceived by academics from Stanford Graduate School of Business and the Australian National University. Independent research found that the implementation of US-dollar AXI enhances the efficiency, transparency, and stability of U.S. financial markets. A recent independent review by IBM Promontory found that relevant IOSCO Principles for Financial Benchmarks were fully implemented for USD-dollar AXI and FXI. The Firm 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), the U.S. Chamber of Commerce (USCC) and Bretton Woods Committee (BWC). The firms panel of Advisors includes former US Treasury Secretary Lawrence H. Summers, other distinguished academics and practitioners. For more information, please visit www.SOFR.org.
Disclosures
SOFR Academy supports near risk-free rates such as SOFR, €STR, TONA, TORF, and the Chinese Depository-Institutions Repo Rate (DR). Over time, we also support robustly defined across-the-curve credit spread supplements such as AXI and FXI which can be used in conjunction with risk-free rates. 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 or FXI are associated with, or endorsed or sponsored by, The New York Fed, or the Federal Reserve System.
Darrell Duffie, The Adams Distinguished Professor of Management and Professor of Finance at Stanford Graduate School of Business, is a co-author of the original proposal for AXI and FXI but has no related compensation and has no affiliation with SOFR Academy.
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