Vaisala Oyj : Publication of the overnight TIIE funding rate and improvement of TIIE rates with longer than overnight maturities

"2020, Año de Leona Vicario, Benemérita Madre de la Patria"

Press release

January 15th, 2020

Publication of the overnight TIIE funding rate and improvement of TIIE rates

with longer than overnight maturities

In order to foster the sound development of the financial system and abide by the recommendations of the Financial Stability Board (FSB), the Bank for International Settlements (BIS), and the International Organization of Securities Commissions (IOSCO) regarding the characteristics that risk free rates must have,1 Banco de México has decided to:

1. Publish a new reference rate that fully complies with the characteristics recommended by IOSCO and reflects the funding market conditions of transactions denominated in Mexican pesos, settled by banks and brokerage firms secured by debt instruments issued by the Federal Government, the Mexican Bank Savings Protection Institute (IPAB, for its acronym in Spanish), and the central bank. This rate will be denominated overnight TIIE funding rate and for such purpose Banco de México takes the following actions:

1. As of January 16th, 2020, Banco de México will publish the overnight TIIE funding rate on its websitewww.banxico.org.mx,on a daily basis. In order to provide market participants with historical data of the new rate, the time series will contain information since January 2006.
2. The Circular 3/2012 issued by Banco de México has been modified to establish the new methodology of the overnight TIIE funding rate and to consider the new rate as a reference for bank's passive transactions with a variable interest rate. It is worth mentioning that Circular 3/2012 already considers the comments drawn from the public consultation that was carried out from November 1 to November 15 of 2019.
3. In general terms, the overnight TIIE funding rate will be calculated based on the daily observed transactions in the funding market settled by banks and brokerage firms (total sample base). Specifically, this rate will consider wholesale overnight repurchase agreement (repo) transactions settled by

1 The FSB recommends that reference rates comply with the principles established by the IOSCO. These principles seek to provide legitimacy to the determination of such rates by addressing relevant aspects, such as governance, estimation methodology, accountability, and quality of reference rates. For more information refer to: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf

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"2020, Año de Leona Vicario, Benemérita Madre de la Patria"

banks and brokerage firms. The instruments issued by the Federal Government and considered for the computation of this rate, are: Certificados de la Tesorería de la Federación (Cetes), Bonos de Desarrollo del Gobierno Federal con Tasa Fija (Bonos M), Bonos de Desarrollo del Gobierno Federal (Bondes D), and Bonos de Desarrollo del Gobierno Federal denominados en unidades de inversión (Udibonos), instruments issued by IPAB (Bonos de Protección al Ahorro, BPAs) and those issued by the central bank (Bonos de Regulación Monetaria, Brems).

1. The overnight TIIE funding rate is determined as a volume-weighted median of the transactions mentioned in the previous paragraph. The volume- weighted median is calculated by ordering the transactions of the total sample from the lowest to the highest rate. Thus, the first transaction is the one with the lowest interest rate of the sample base and the last operation is the one with the highest interest rate. Then, for each transaction, the cumulative volume is calculated and expressed as a percentage of the total volume. The interest rate associated with the transaction which represents the 50% of the cumulative volume will be the volume-weighted median and in turn will also be the rate corresponding to the overnight TIIE funding rate.
2. The overnight TIIE funding rate will be published daily from 17:00 hrs., the same banking day in which it is calculated, according to Circular 3/2012.

By being based on the daily observed repo transactions settled by banks and brokerage firms in the market, the overnight TIIE funding rate will fully comply with international standards to be considered as a near risk-free reference rate (RFR). For this reason, Banco de México will promote the development of the new overnight TIIE funding rate in order for it to be a benchmark in the money market.

2. Improve the methodology for TIIE rates with longer than overnight maturities.

1. TIIE rates with longer than overnight maturities will continue to be calculated using the same methodology established in Circular 3/2012 and will also be used as reference rates. Nonetheless, certain aspects of governance, accountability and quality will be improved to comply with most IOSCO principles mentioned above.
2. Among the modifications to Circular 3/2012 seeking to align TIIE rates with longer than overnight maturities to the IOSCO principles, a Code of Conduct applicable to the institutions that participate in determining TIIE rates will be added.

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"2020, Año de Leona Vicario, Benemérita Madre de la Patria"

3. The methodologies for calculating the overnight interbank funding rate secured with bank debt instruments (bank funding rate) and the overnight interbank funding rate secured with government debt securities (government funding rate) will be modified in order to calculate such rates as a volume-weighted median using a methodology consistent with the overnight TIIE funding rate methodology.2 As of January 16th, 2020 Banco de México will stop publishing the interbank weighted-average government funding rate, +BPAs and the BREMs rate (which considers repo transactions of securities issued by the Federal Government, Banco de México and the IPAB) given that the market it represents is the same as that of the overnight TIIE funding rate.

2 The methodological notes are available on Banco de México's website. The securities used to calculate the overnight interbank funding rate secured with bank paper are: promissory notes, certificates of deposit, and banker's acceptances. The securities used to calculate the overnight interbank funding rate secured with government paper are: Certificados de la Tesorería de la Federación (Cetes), Bonos de Desarrollo del Gobierno Federal con Tasa Fija (Bonos M), Bonos de Desarrollo del Gobierno Federal (Bondes D), and Bonos de Desarrollo del Gobierno Federal denominados en unidades de inversión (Udibonos).

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