In 2001, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) of Mexico and found that its securities regulation framework was in broad observance with the Objectives and Principles of Securities Regulations promulgated by the International Organization of Securities Commissions (IOSCO), although it noted a number of shortcomings. Following the initial assessment, in April 2001, Congress enacted a series of legal reforms to address many of the identified shortcomings. Among the changes was the extension and strengthening of the authority of the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV), the legalization of cooperation with foreign regulators, and the reform of essential corporate governance issues. In 2006, a new the Securities Market Law was enacted, further strengthening the CNBV's authority. As a result, a 2007 Financial Sector Assessment Program update by the IMF rated 27 of the 30 IOSCO principles as "implemented," with the remaining three judged to be "broadly implemented."

General Overview

The Mexican legal framework is based on civil law. The two key laws comprising the framework of securities regulation are the Company Law (Ley General de Sociedades Mercantiles, or LGSM), and the Securities Market Law (Ley del Mercado de Valores, or LMV). The LGSM, enacted in 1934 and most recently amended in 1996, establishes basic company forms. The LMV, which regulates public companies, was introduced in 1975. In March 2001, the International Monetary Fund (IMF) conducted its first assessment of the Mexican securities market framework against the International Organization of Securities Commissions (IOSCO) Principles and Objectives of Securities Regulation. It found that the Mexican system is designed to address all three of the core objectives of the IOSCO Principles regarding the protection of investors; the fair, efficient, and transparent functioning of markets; and the reduction of systemic risk. However, the 2001 assessment noted several areas where legal shortcomings limited the regulators abilities. To address these, the IMF recommended that the capital market regulator, the National Banking and Securities Commission (CNBV), be given additional legal authority to implement its enforcement responsibilities. Its scope of enforcement authority should also be increased and it should be permitted to publicize its actions, which should increase investor confidence in the securities markets. In addition, the IMF recommended greater flexibility in the regulatory structure through reducing regulatory overhead, thereby attaining greater market efficiency. Also, the IMF suggested improving public confidence in the CNBV regulatory process through greater transparency and the introduction of procedures for public and industry comment. Minority shareholder rights should also be improved through improved corporate governance standards and easier access to the courts to protect these rights. Finally, the IMF recommended the adoption of international standards for sharing information with foreign regulators and with other domestic regulatory authorities.

Immediately following this initial assessment, in April 2001, the Mexican Congress passed a series of legal reforms that, according to the 2007 IMF Financial Sector Assessment Program (FSAP) Update, were "designed to address each of these core areas" (p. 11). The CNBV used the 2001 reforms to significantly expand its activities. Some of the concerns over its operational transparency were addressed by reviewing and unifying secondary regulation. The IMF notes that the CNBV also used its information sharing authority and was approved to become a signatory to the IOSCO multilateral memorandum of understanting (MMoU) on information sharing. The IOSCO MMoU is based on the thirty IOSCO Principles of Securities Regulation adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU.

Finally, at the request of the Secreteriat of Finance and Public Credit (Secretaria de Hacienda y Crédito Público, or SHCP) and the CNBV, a new Securities Markets Law was enacted in 2006. According to the 2007 FSAP Update by the IMF, the new law changed the securities market framework in three broad areas. It expanded the CNBV's authority and gave it broad authority to adopt regulations and procedures to implement the requirements of the law. It introduced significant changes in corporate governance practices of publicly listed companies. It created "two new corporate vehicles, designed to facilitate the ability of small and medium-sized companies to raise capital and transition to public listed company status" (p. 12).

As a result of these comprehensive reforms, the 2007 update by the IMF, which includes a "Detailed Assessment on the Implementation of the IOSCO Objectives and Principles of Securities Regulation," notes substantial progress in all areas since the original 2001 assessment. The assessment asserts that Mexico has a complex regulatory structure that consists of several government agencies which have "distinct responsibilities but interlocking supervisory structures and numerous legal responsibilities to consult prior to taking action" (p. 9). The capital market regulator is the CNBV. It is a supervisory arm of the SHCP, supervises banks and the securities market, and enforces shareholders rights. The CNBV is headed by a 10-member Board of Governors. Five members, including the President of the Commission, are appointed by the SHCP, three members are appointed by the Central Bank, and the pension regulator (CONSAR) and the insurance regulator (CNSF) each appoint one member. According to the 2007 IMF FSAP update, the CNBV has certain operational independence, but the SHCP has broad supervisory responsibility over the CNBV, such as setting its annual budget, and the final authority over legal interpretations of the relevant laws.

The Mexican Stock Exchange (Bolsa Mexicana de Valores, or BMV) is a member-owned, for-profit institution. The 2007 IMF FSAP Update notes that, between 1995 and 2001, both trading activity and the number of listed companies on the BMV declined. However, a gradual increase in the number of securities offerings in Mexico (both equity and debt) was observed since then by the IMF. In 2004 to 2006, over 50 debt offerings have been issued. Still, the IMF notes, Mexico's equity market remains relatively small and illiquid, and it is not a major source of financing for most companies. Among the eight largest economies in the Americas, relative to GDP, Mexico has the second smallest stock market. After a number of compulsory delistings by the CNBV, the number of listings declined to 132 (155 listed stocks). The daily trading volume on the BMV is highly concentrated among a very small number of issuers. Four stocks (Telmex, AMX, Walmex, and Cemex) comprise approximately 50 percent of the primary equity market index (Indice de Precios y Cotizaciones, or IPC). Overall, the IMF notes, market capitalization of the BMV has grown from US$104 billion in December 2002 to US$236 billion at the end of 2005. Free float is limited and trading volumes are also low.

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

FC

According to the 2007 IMF FSAP update, which included the "Detailed Assessment on the Implementation of the IOSCO Objectives and Principles of Securities Regulation," this principle is "Implemented." The 2006 Securities Markets Law expanded the CNBV's authority and gave it broad authority to adopt regulations and procedures to implement the requirements of the law. The IMF also notes that the 2001 amendments and the 2006 Securities Market Law "provided the CNBV with all authority required to perform its regulatory responsibilities" (p. 16).

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

CP

The 2007 IMF FSAP update rates this principle as "Broadly Implemented." The assessment asserts that Mexico has a complex regulatory structure which consists of several government agencies with distinct responsibilities but interlocking supervisory structures. While the CNBV appears to be operationally independent in the exercise of its functions, the IMF cautions that "there is no certainty that this will continue into the future because various other agencies have the authority to intervene and overrule CNBV activities" (p. 17). It also notes that the CNBV board members have no fixed terms and are therefore susceptible to external pressure. Although the IMF acknowledges that there has not been any indication of interference, it nonetheless recommends a review of these procedures.

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

CP

The 2007 IMF FSAP update rates this principle as "Broadly Implemented." The CNBV does not have budgetary independence but appears to receive adequate operating budgets. According to the assessment, the CNBV staff thinks that the budget is sufficient for the regulator to function adequately, even if there could be more professionals. Still, the IMF cautions, the "ability of the SHCP to restrict the CNBV budget creates a potential for future limitations to be imposed on resources" (p. 17).

4. The regulator should adopt clear and consistent regulatory processes.

CP

According to the 2007 IMF FSAP update, this principle is "Broadly Implemented." While there has been major progress since the 2001 assessment in terms of the transparency of the CNBV decisions, the 2007 update notes that there were still problems with the transparency of judgments on regulatory violations found by the CNBV, as the "CNBV disciplinary process is still largely internal and provides only limited due process protection" (p. 18).

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." The code of conduct for the CNBV staff prohibits the use or the public disclosure of any confidential information, including information concerning investigations, inspections or disciplinary actions taken by the CNBV.

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." The following private organizations are self-regulatory organizations (SROs): the BMV and MexDer (the Mexican derivatives market), AMIB (the organization of securities firms), AMAII (the Association of Independent Investment Advisors), INDEVAL (the central securities depository for clearance and settlement), and ASIGNA (MexDer's clearance and settlement entity). The IMF notes that none of them has investigative or disciplinary authority over its members.

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." The SROs are subject to governmental oversight, in some cases by more than one regulator. The IMF notes that the "overlapping authority was cited by some industry officials as impeding market innovation, as the regulators may not reach consensus quickly" (p. 19).

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

FC

According to the 2007 IMF FSAP update, this principle is "Implemented." The assessment notes that the 2001 legal reforms significantly increased the CNBV's ability to conduct investigations by authorizing it to demand production of documents and testimony from firms subject to its regulation. The 2006 Securities Market Law further increased the authority to encompass auditing firms, external auditors, attorneys, and others who may have violated Mexican securities laws. The inspection program is deemed to be comprehensive because all firms except independent investment advisers are inspected at least once in two years.

9. The regulator should have comprehensive enforcement powers.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." The report asserts that the CNBV now has comprehensive enforcement powers and "has demonstrated a willingness to utilize this authority" (p. 20).

10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." The IMF notes that most of the limitations identified in the original 2001 assessment have been addressed. The CNBV is entitled to request testimony or documents from anyone. If necessary to conduct an investigation, it can demand securities firms and other regulated firms to correct identified deficiencies in an inspection. The IMF notes, however, that there are "still limitations on its ability to obtain restitution for defrauded investors. There continues to be room for improvement in the due process protections in its disciplinary process" (p. 21).

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

FC

According to the 2007 IMF FSAP update, this principle is "Implemented." The assessment notes that the 2001 amendments to the law and the 2006 Securities Market Law addressed the previous legal limitations to share information. The CNBV has broad authority to obtain any information from regulated entities and is entitled to share that information with foreign regulators.

12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

FC

According to the 2007 IMF FSAP update, this principle is "Implemented." The CNBV used the 2001 reforms to significantly expand its activities. Some of the concerns over its operational transparency were addressed by reviewing and unifying secondary regulation. The IMF notes that the CNBV also used its information-sharing authority and was approved to become a signatory to the IOSCO MMoU on information sharing. The IOSCO MMoU is based on the thirty IOSCO Principles of Securities Regulation adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU.

13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." The CNBV can provide any information that is obtained through its investigative functions. The 2006 Securities Markets Law allows the CNBV to compel information from lawyers, auditing firms, and external auditors concerning disclosure by listed companies.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." In 2001, the IMF had highlighted the limited disclosure of officer and directors' transactions. The 2007 assessment noted significant progress made in both areas, although further progress in officer and director transactions would be beneficial.

15. Holders of securities in a company should be treated in a fair and equitable manner.

FC

According to the 2007 IMF FSAP update, this principle is "Implemented." The protections for minority shareholders created in the 2001 amendments to the LMV and the 2006 Securities Market Law substantially changed the legal protection of minority shareholders. The 2006 Securities Market Law provisions give shareholders greater rights than previously. With 10% of shares they can appoint one director to the board, and call for extraordinary general meetings. With 5% of shares, civil lawsuits can be presented against directors and executives, and with 20% judicial opposition can be presented against resolutions made during annual general meetings (AGMs). At AGMs, shareholders must define the policies for the use of company assets in favor of related executives or directors, as well as operations with related parties or amounts, the nomination of directors, and policies for internal auditing systems. The IMF notes in its 2007 assessment that "the real test of the effectiveness of these reforms will ultimately rest with a company's Board of Directors and a Board's willingness to act in accordance with the spirit and the letter of its legal responsibilities" (p. 25).

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

FC

According to the 2007 IMF FSAP update, this principle is "Implemented." The assessment noted major progress in this area since 2001 and encouraged a comprehensive review of Mexican audit standards.

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

FC

According to the 2007 IMF FSAP update, this principle is "Implemented." The 2001 Mutual Funds Law authorized the CNBV to register and regulate operators, distributors, and marketers of mutual funds, whether owned and operated by banks or securities firms. The IMF explains that the CNBV relies upon an examination and certification process operated by AMIB, a self-regulating organization of securities firms, for individuals selling mutual funds.

18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

FC

According to the 2007 IMF FSAP update, this principle is "Implemented." The assessment noted that the 2001 Mutual Funds Law mandated structural changes in all mutual funds and that fund operators must be legal entities separated from banks or securities firms. The IMF notes, however, that "approximately half of all funds are owned subsidiaries of the firms providing these services and the Board that oversees the fees charged for these services are appointed by the fund operator" (p. 27). The assessment recommended considering whether that creates an effective control of mutual fund fees and expenses.

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." Mutual funds in Mexico need to be sold via a CNBV-reviewed prospectus. The IMF notes that the Mexican regulatory system for mutual funds is a "hybrid of disclosure and merit/ prudential limitations on the investment freedom of a fund operator" (p. 28). In the opinion of the IMF, this strongly influences investment discretion and potentially results in less competition between funds in the same category.

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." The Mexican system utilizes independent price vendor to price portfolio holdings. The net asset value is calculated by one of two third-party valuators. One of the valuators is owned by the Mexican Stock Exchange. However, as most Mexican financial market instruments are traded only infrequently, a market price can be established only seldom. The services of the valuators are therefore becoming more relevant, the IMF noted, however, that "vendors use their alternative valuation process infrequently, as its use creates a liability risk for the vendor" (p. 28). The IMF recommends that careful attention be paid to this issue.

21. Regulation should provide for minimum entry standards for market intermediaries.

FC

According to the 2007 IMF FSAP update, this principle is "Implemented." The 2006 Securities Market Law transferred the task of securities firm licensing from the SHCP to the CNBV.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." Initial and ongoing capital requirements for securities firms are set by the CNBV. The IMF assessment notes that the regulator's staff was initiating a review of capital adequacy on a consolidated basis for affiliated banks and brokers. The IMF recommended the process be formalized to include an investment firm's risk-management procedures.

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." The application process with the CNBV includes the firm's management structure. The requirements of the CNBV include that key duties be seperated in order to avoid conflicts. Customer funds must be separated from firm proprietary accounts and all firms must have a compliance officer. In addition, an annual legal audit has to be submitted to the CNBV.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

FC

According to the 2007 IMF FSAP update, this principle is "Implemented." The CNBV monitors capital adequacy to contain loss of investors and systemic risk. In addition, each member securities firm must maintain a risk account at INDEVAL (the central securities depository for clearance and settlement) to cover failed transactions. The IMF lauded the fact that the CNBV was provided with the clear authority to intervene if a firm fails. It also praised the creation of an equity trading central counterparty, but noted that since most trading in Mexico is in the debt market, a "cost-benefit analysis to determine whether the debt market would benefit from creation of a central counterparty" (p. 31) could be warranted, although it acknowledged this would fall into the responsibility of the Central Bank of Mexico.

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

FC

According to the 2007 IMF FSAP update, this principle is "Implemented." The three key markets in Mexico are the Mexican Stock exchange for equity, the MexDer for derivatives/futures, and the Over-the-Counter debt market. The market is partially organized via SROs and subject to the CNBV oversight. The equity market is very small. The IMF notes the Global Mercado and the creation of the SAPI B corporate vehicle (via the 2006 Securities Market Law) as creative attempts to increase its significance.

26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." The assessment notes that the CNBV conducts periodic inspections and reviews of all rule amendments by the Bolsa, and also performs its own real time market surveillance. The report criticized the regulatory approval process for MexDer, calling its requirement for consideration and consultation by three government agencies "cumbersome" (p. 33) because it impedes the development of new derivative products and hinders the MexDer's ability to compete with foreign markets.

27. Regulation should promote transparency of trading.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." At the time of the 2001 IMF assessment, brokers had up to 20 minutes to submit orders to the Stock Exchange. This has since been shortened to 5 minutes. In its 2007 assessment, the IMF recommended that issues of transparency in the debt market, be addressed, especially with regard to less liquid government securities.

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." While the regulations and surveillance programs in place seem to be appropriate, the illiquidity of the Mexican market, partially liquid and non-transparent debt market, and small equity market justifies continuous vigilant CNBV oversight.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

FC

The 2007 IMF FSAP update rates this principle as "Implemented." The IMF explains that in order to "cover large exposure and default risk, positions of intermediaries are limited by means of a series of prudential ratios set by regulation. The CNBV has prescribed, in cooperation with the Bolsa and INDEVAL, certain market default and unwind procedures, as well as rules to halt trading" (p. 34).

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

FC

According to the 2007 IMF FSAP update, this principle is "Implemented." INDEVAL and its subsidiary, the Contraparte Central de Valores (CCV), are both self-regulating organizations with rules subject to CNBV review. The IMF notes that, as a result of the 2001 reforms, "clearance and settlement of transactions processed through INDEVAL appears to be sound" (p. 35).