The Global Market at the Mexican Stock Exchange

By Miguel Moreno Tripp, PhD, Professor at EGADE Business School and Partner at Gossler, S.C., a Member of Crowe Global

The Global Market, officially known as the International Quotation System (SIC, or Sistema Internacional de Cotizaciones), is a section of the Mexican Stock Exchange; it is a platform that allows Mexican investors to invest in shares and exchange-traded funds (ETFs) listed offshore.

A brief history of the Mexican Stock Exchange^{1The book 125th Anniversary of the Mexican Stock Exchange, by Lourdes Mendoza, first edition 2020, was consulted for historical information.}

Mining companies’ shares began trading in Mexico circa 1850. By 1867, the first securities law, the Securities Brokerage Regulatory Law, was passed to regulate the nascent stock-market financial sector. In January 1907, the authorization of a single stock exchange was enacted. In 1925, the central bank (BANXICO, or Banco de Mexico) was created. This event revitalized the trading activities of mining and banking.

From 1940, various regulations were issued to regulate trading on the stock exchange. On May 31, 1941, the General Law of Credit Institutions and Auxiliary Organizations was promulgated, which established requirements for the retail sales of shares of public limited companies.

On April 16, 1946, the Ministry of Finance (MOF) created the National Banking and Securities Commission (CNBV, or Comisión Nacional Bancaria y de Valores) to supervise the country’s stock-market activity, modeled after the United States Securities and Exchange Commission (SEC). Electronic equipment for recording operations and processing information was installed by 1970.

A new (at the time) Securities Markets Law was enacted on January 2, 1975, which lasted, with subsequent updates, until June 28, 2006.

In October 1978, the Índice de Precios y Cotizaciones (Index of Prices and Quotations), which would become the main market indicator of the Mexican stock market, was established. Its predecessors were the Average of Events from 1900 to 1957 and the Average of Stock Prices from 1958 to 1965.

In December 1989, the Securities Market Law was amended, authorizing Mexican companies to list their shares abroad and also allowing brokers to open offices overseas. In August 1990, the limit on foreign participation in Mexican companies increased to 49 percent.

The current Securities Market Law was enacted on June 28, 2006. Its latest update was published in the Official Gazette (Official Journal of the Federation) on September 1, 2019. (For a law or regulation to become official, it should be published in the Diario Oficial de la Federación [DOF].)

International Quotation System (SIC, or Sistema Internacional de Cotizaciones)

The first predecessor of the SIC can be traced back to 1997 with the draft of the SIC Memorandum that would give rise to Mexican ADRs (American depositary receipts)-foreign companies issuing shares in Mexico. (The Mexican Financial authorities are the Secretaría de Hacienda y Crédito Público [SHCP], which reports to the president; the Comisión Nacional Bancaria y de Valores [CNBV, National Banking and Securities Commission—the Mexican SEC]; and Banxico [Bank of Mexico, the central bank]. They all issue financial regulations employing memoranda detailing and complementing the regulations enacted by law. The Mexican Stock Exchange also acts as an SRO [self-regulatory organization].)

However, Mexican brokers had to provide research and detailed information about foreign issuers, something with which they did not feel comfortable. Between 1997 and 2003, the SIC market activity was close to zero. Even so, SIC activity was steadily increasing. By 2001, BlackRock included Brazilian companies, and Deutsche Bank listed more companies.

In 2003, the Mercado Global BMV initiative offered the possibility of acquiring and selling shares listed in recognized markets in other countries via Mexican brokers. Deutsche Bank, based on the memorandum of 1997, was looking to achieve adjustments to the regulatory framework, with the bank itself becoming the sponsor of the foreign issuers and agreeing to provide the information that the market required.

By May 2003, 29 of the 30 U.S. Dow Jones Industrial Average (DJIA) companies had joined the SIC. At the end of November of the same year, 48 of the 50 companies listed on the Euro STOXX 50 index were also included. At the same time, new investment companies were created. However, only qualified and institutional investors could access these securities. The same year, concurrent with the CNBV, the International Quotation System was relaunched at the BMV (Mexico Stock Exchange), which standardized access to stock offers issued by companies.

On December 18, 2003, the SHCP published in the Official Journal of the Federation the general requirements applicable to the SIC, defining the conditions under which the CNBV would grant recognition to foreign securities and foreign issuers for listing in the SIC, provided they had been registered by the applicable European Communities (EC) regulatory entities or by the technical committee of the International Organization of Securities Commissions (IOSCO).

Customer surveys were conducted between 2006 and 2007 to identify which sectors investors were looking at. As a consequence, real-estate securities and dollar-referenced securities remained, as did securities referenced to gold. Trading in gold was available only through the SIC.

Once the Mexican Administradoras de Fondos para el Retiro (AFORE) started investing in international securities through the SIC, the market took off. (In Mexico, a mandatory defined contribution retirement plan for every worker is in place. As in many markets, the members of the AFORE in Mexico—institutional investors—are the largest group of investors.) In 2007, the Comisión Nacional del Sistema de Ahorro para el Retiro(CONSAR—the overseeing regulatory body of the AFORE) issued regulations that allowed the AFORE to invest in the SIC. Interest in the SIC increased, and J.P. Morgan entered around 2011, joining the Bank of New York.

By 2014, the regulation changed, eliminating restrictions on the types of investors who could invest in the SIC—so that anyone, including retail investors, could invest in the SIC. This was when Mexican brokers offered the SIC to their clients. Moreover, Grupo Bursátil Mexicano (GBM, a Mexican broker) launched a campaign among its customers, asking them which companies they wanted to be incorporated into the SIC. GBM customers voted, and the highest-scoring stock was brought in. These campaigns paid off by attracting more investors.

The next milestone occurred in 2017, when the role of the sponsor was eliminated. Costs were also reduced, which, although they were pennies on a per-transaction basis, added up to hundreds of thousands of dollars overall. The CNBV eliminated the sponsor role, and custody was passed to the Instituto para el Depósito de Valores (INDEVAL—a custodian section of the Grupo Bolsa Mexicana de Valores, or Grupo BMV). They were then responsible for giving the information to the investing public.

By 2018, some international banks had sought to replicate the Mexican SIC in other markets, such as Vietnam, without success. Presumably, the SIC worked in Mexico because the time difference with New York was only one hour.

SIC operation

The SIC operation is carried out through the BMV’s electronic trading system. According to the BMV, the SIC’s main advantages are:

• Same tax scheme as the domestic market,
• Global diversification without the need to open an international investment account,
• Equal corporate rights as local investors,
• Traded in Mexican pesos,
• Continuous growth in trading volume,
• Practically unlimited liquidity, due to trading either in the domestic market or stock exchange of origin,
• Hundreds of investment options,
• Issuer/ETF press releases and corporate actions are reported to the BMV; therefore, the Mexican investor is always informed,
• Successful and reliable system since 2003 with thousands of active investors,
• Since January 2014, any type of investor can participate in the SIC.

There are two ways investors can buy SIC securities: through an intermediary, such as a broker, or by acquiring an investment fund (ETF) from a fund’s operator or distributor.

The SIC is divided into three sections: equity, debt and ETFs. To list a security, the issuer must have at least three months of trading in the market of origin, and a member authority of IOSCO must regulate the stock exchange of origin. The International Accounting Standards must be followed, and timely delivery of information and obligations to investors must be complied with—as well as providing homogeneous corporate information. (In Mexico, listed companies must follow the International Financial Reporting Standards [IFRS]. Mexican private companies follow Mexican accounting principles.)

As of December 2022, the available listed securities at the Mexican Stock Exchange were as follows:

A history of listed equity shares over the last few years is provided in the following charts.

The Global Market presents an entirely different perspective. The following table shows the number of securities listed on the Global Market per year (Left Axis). The line shows the accumulated available securities, which is 1,857 as of 2022 (Right Axis):

The number of countries of origin in the Global Market is 48. The following table shows the number of securities listed by the top 10 countries of origin as follows:

The following table shows the daily average number of trades, value traded and trading volume for domestic equities as well as for the Global Market for the indicated periods:

However, considering only the last four years, from January 2019 to December 2022, these are the results:

In the last four years, considering the value traded, the Global Market maximums surpassed the Domestic Market maximums.

The following graph shows the difference between the Domestic minus Global Daily Average Value Traded in million pesos:

The difference, Domestic minus Global, was large until 2010; however, this difference steadily became less until it was negative—i.e., the Global Daily Average Value Traded became larger than the Domestic. However, for the last four years, the two markets have been on par, as shown in the next graph:

Conclusion

The number of international shares listed on the Global Market of the Mexican Stock Exchange has grown almost exponentially since its inception. But for the last five to six years, the average number of newly listed shares has been around 250 per year: this contrasts with the steady number of domestic equity shares of 140.

The year-over-year Daily Average Value Traded in the Global Market grew by around 15 percent. This led to it being on par with or greater than the Domestic Market in the last four years.

An interesting, almost existential, question: Should the Mexican Stock Exchange continue with both markets, or would a spin-off of the Global Market be advisable?

Reference

¹ The book 125th Anniversary of the Mexican Stock Exchange, by Lourdes Mendoza, first edition 2020, was consulted for historical information.