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Emerging Markets Fixed Income Research March 2011
Latin America Rates Guide 2011

Exploring Latam instruments, regulations and market conventions
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
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Contents
Overview Market profiles
Argentina Brazil Chile Colombia Mexico Peru Uruguay
2 9
10 16 23 29 34 41 46
Disclosure appendix Disclaimer
51 52
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Overview
Foreign interest in Latin American local markets continues to grow as the
process of rating convergence and capital account opening deepens

Investing in the local markets offers interesting opportunities but involves
a set of risks and regulations that investors need to be aware of

HSBC Rates Guides are an essential information source for investors
venturing into local markets
The local markets: Risks and opportunities

Investing in the local markets could offer interesting returns, but it also involves a set of risks, conventions, and regulations not present in hard-currency bonds. These risks can be divided into two groups: economic and legal/regulatory. As the assets are denominated in local currency, the returns for foreign investors also depend on fluctuation of the value of the local currency to that of origin. The correlation between rates and FX has not been stable over time. Also, as these instruments are generally payable in the domicile of the issuer, investors are exposed to convertibility risk, which is subject to potential restrictions on repatriation of their capital. In the case of a credit event, because investments are issued under local law, investors might have to face an issuer in foreign courts, which could delay the speed and amount of any recovery.
Table 1: Types of debt and risks involved External debt Currency Payable Law Convertibility risk FX risk Credit risk Example instrument
Source: HSBC
Local currency global bonds LC USD Foreign No Yes Yes BRL Global 28
Fixed or floating local debt LC LC Local Yes Yes Yes Brazil LTN
Inflation-linked debt Inflation units LC Local Yes Yes Yes Brazil NTN-B
Hard currency Same currency Foreign No No Yes Brazil 34
Understanding risks and regulations involved when investing in the local markets is crucial. We regard HSBC Rates Guides as an essential tool for investors venturing into local markets. These guides provide a full description of local fixed-income instruments, a brief history of the evolution of local markets, the functioning of countries monetary policies, and an explanation of regulatory, settlement, and tax issues. We also recommend complementing these guides with the information contained in HSBCs Emerging Markets Currency Guide 2011: A guiding light, 19 January 2011.
The change in Latin American sovereign balance sheets

History shows that reliance on foreign currency debt is a source of vulnerability for a sovereign that does not have the ability to print the currency it owes. While sources of foreign exchange (exports and portfolio flows) are variable and subject to shocks, debt obligations to foreigners are fixed in nominal terms, making borrowers subject to any liquidity crisis. The typical Latin American sovereign balance sheet of the 80s and 90s was heavy in foreign currency-denominated debt and respectively light on international reserves. The presence of foreign debt then reduced the expansionary effect of currency depreciation, and might even have turned this contractionary in cases of
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Chart 2. Argentina: Public external foreign balance sheet
120,000
Chart 1. Brazil: Public external foreign balance sheet

250,000 200,000 150,000
USD mn International reserves x-gold Public and publicly guaranteed external debt
USD mn International reserves x-gold Public and publicly guaranteed external debt
100,000 80,000 60,000
100,000
40,000
50,000 87 89 91 93 95 97 99 01 03 05 07 09
20,000 87 89 91 93 95 97 99 01 03 05 07 09
Source: World Bank, BCB
Source: World Bank, BCRA
high foreign debt. This is because both fiscal and monetary policies needed to be tightened pro-cyclically whenever there was an external shock. Countries borrowed heavily in hard currency for several reasons. First, savings rates domestically were very low, and strong investment needs required foreign financing. The lack of a strong pension system did not provide a solid pool of domestic savings from which investments could be funded, while institutional fragilities led local residents to park large proportions of their savings abroad. Second, borrowing costs were perceived to be much lower in foreign than local currency, in particular at times of fixed exchange rates. Third, local currency lending, when available, was generally for short maturities. This is what economic literature calls original sin the inability of countries to borrow in their own currency for long terms or in the international markets or both. Things have changed. Starting at the beginning of the 2000s, Latin American countries started to change the compositions of their balance sheets, increasing their assets and decreasing their liabilities in foreign currency. How was the original sin overcome? Several things happened at the same time. The adoption of a credible inflationtargeting framework allowed for issuance of inflation-linked securities. Also, inflation expectations delinked from the exchange rate, reducing volatility of local interest rates and the proliferation of floating local debt. These two, inflation linkers and floating paper, were the precursors of the local debt markets in Latin America. Key to the future development of the market was consolidation of a domestic investor base, which followed from creation of a defined-contribution pension system and an increase in the amount of local deposits due to improved regulation and supervision in the financial system. Foreign investors were attracted to local markets by strong economic growth; a reduction of macroeconomic volatility that led to achievement of investment-grade by Mexico, Brazil, and Peru (Chile was already investmentgrade); a process of interest rate convergence; currency appreciation expectations; and portfolio diversification
Chart 3. Brazil local debt composition
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Fixed rate
Chart 4. Mexico debt composition

100% Inflation-linked 80% Floating-rate
FX-Exchange
Floating rate
60%
Inflation Linked
40% 20%
Fixed-rate
0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: SHCP
Source: Brazil National Treasury
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Chart 6. Traded volume per instrument
2,500 USD mn EXD Other Local Latam Local
Chart 5 Accumulated flows since 2007

40,000 30,000 20,000 10,000 0 -10,000 -20,000 2007 2008 2009 2010 2011 USD mn T otal EM funds Local markets
2,000 1,500 1,000 500 0 1997
1999
2001
2003
2005
2007
2009
Source: EPFR
Source: EMTA
objectives. This not only increased the market cap of local debt, but also increased the level of foreign reserves, further contributing to the process of balance sheet strengthening.
A growing market
Investors appetite for local markets has been growing consistently. Attracted at times by significant carry, prospects of interest rate convergence, and currency appreciation, emerging markets local market funds have been set up around the world. In addition, EM local markets have attracted increasing interest from crossover funds. Chart 3 shows that local currency funds have been the main driver of increases in assets under management at EM-dedicated funds. Trading of local-market instruments now accounts for almost 70% of the volume traded in EM fixed income, up from 31% in 2000. EM countries now are forming part of the major bond indices, although their weightings are very low. For example, the EM composition of Citigroups World Global Bond Index (WGBI) is less than 2%, and Mexico, the only Latin American country included, represented only 0.63% by end of February 2011. Yet the share of EM in global indices continues to grow, on the back of higher ratings, deepening liquidity, and easier access for foreign investors. At the same time, several benchmarks are looking at EM local markets exclusively. The most commonly used are the JPMorgan GBI-EM Global and ELMI families, in which Latin America represents about 25 and 20%, respectively. Barclays runs an EM government inflation-linked index, in which Argentina, Brazil, Chile, Colombia, and Mexico are represented.
Chart 7. Composition of GBI-EM Global Diversified

Brazil, 10.0% Chile, 0.1% Colombia, 4.2%
Chart 8. Composition of ELMI+

Mex ico, 10.2% Colombia, 2.1% Chile, 2.0% Brazil, 2.0% Argentina, 2.0% MENA, 7.9% Peru, 1.6%
Asia, 33.6%
Mex ico, 10.0% EMEA, 50.9% Peru, 0.2%
Asia, 24.5%
EM Europe, 38.7%
Source: EPFR Source: HSBC
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Foreign participation varies by market

Participation of foreign investors in Latin American local markets has been growing steadily. Chart 10 shows that this escalated in the case of Mexico over the course of 2010 because of that countrys inclusion in the WGBI index. This suggests that further rating convergence will allow for the inclusion of other countries into global indices and force higher allocations to EM in general and to the region in particular. An International Monetary Fund study estimated that each 1% shift in the holdings of US-based, unlevered, institutional investors of domestic securities could translate into a USD45bn reallocation to EM securities annually, or approximately two-thirds of the flows to emerging markets in 20091. Relatively, foreign investors have a strong presence in Latin American markets, slightly less on average than in the biggest EMEA markets but more than in Asia, where some countries show very little participation. In the case of Brazil, participation is close to 10%, up from 5% three years ago. In Peru, participation is the highest in the region, now at 42% and up from zero in 2003. Foreign investor participation in the Colombian local fixed-income market remains significantly lower than in regional peers.
Chart 9. Foreign participation as % of local debt outstanding
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% CO CL BZ MX AR PE TK CZ HU PO CY IN VT PH TH SL TW KO SG ID MY
Chart 10. Mexico foreign participation
25% 20% 15% 10% 5% 0% 1999

Source: Banxico
% of Total amount outstanding
2001
2003
2005
2007
2009
2011
Source: Respective central banks
______________________________________ 1 International Monetary Fund (2010): Resolving the Crisis Legacy and Meeting New Challenges to Financial Stability, Global Financial Stability report, April 2010.
Table A: Region at a glance: Bond market technicals and liquidity Argentina Available repo facilities Onshore with central bank Onshore interbank Offshore investors with onshore Onshore nonbank investor (eg custodian) with onshore Eligible collateral for repos For CB repos Yes Yes No Yes Brazil Yes Yes No No Chile Yes Yes No No Colombia Yes Yes N/A N/A Mexico Yes Yes No Yes Peru Yes Yes Yes, but with special reserve N/A Uruguay Yes Yes N/A N/A
CB bills, CB notes and bonds CB bills, CB notes and bonds Yes Yes N/A Yes
Local sovereign bonds
Central bank bonds
For interbank repos Mark-to-market requirements Banks Insurance companies Pension funds Mutual funds Offshore investor access Direct purchase Subject to cap Registration requirement Access to onshore funding Access to onshore FX hedging Access to rates hedging (IRS, repo, futures) Market liquidity statistics Instrument #1 Daily turnover Buying volume in a single day
Local sovereign bonds
CB, treasury, corp bonds, bank bonds Yes Yes, except LT hedging Yes Yes
TES, Bonos para la seguridad, TRDs, TDAs, Ttulos de Deuda Externa, TCO, FOGAFIN TES, TCO, corporates, FOGAFIN Yes Yes Yes Yes
Federal government bonds Commercial paper, corporate bonds Yes Yes Yes Yes
No
T-bills
No
T-bills
Yes N/A N/A Yes
Internal requirements Internal requirements Yes Yes
Yes Yes Yes Yes
Yes No No Yes Yes Yes
Only through banks Yes Yes No Yes Yes
Through banks or stockbrokers No Yes No Yes IRS
No Yes Yes No Yes Yes
Yes
Yes, with a local custodian and central bank account Yes No Yes Yes
No No Yes Yes Yes
Yes No Yes Yes (interest rate swap)
Treasury bonds ARS1.6bn USD1.0m
LTNs BRL6.5bn USD50-100m 1-3bp depending on maturity NTNBs, NTNFs BRL1.5bn USD50-100m 1-3bp
Bid/offer spreads under normal conditions 25-50bp Instrument #2 Daily turnover Buying volume in a single day Bid/offer spreads under normal conditions
Source: HSBC
Bonds USD300m Depending on tenor, liquid tenors USD30m 5bp for liquid tenors
TES Bonds COP6.0trn COP200bn 2.5bp
MBonos MXN15bn MXN50M 3bp Udibonos MXN5bn MXN30m 3-5bp
Soberanos PEN140m USD50.5m 8bp VACs PEN2.5m USD0.9m 20bp
Bonds USD10.0 USD1.0 50bp
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Table B. Region at a glance: Government bonds Argentina ARS- and CPI-linked

Issuer Currency Form Minimum denomination Tenors Coupon/discount Frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Issuance cycle Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Economy ministry Argentine peso (ARS) Physical ARS1 1 to 30 years Fixed Ad-hoc See text 30/360* USD44bn No schedule N/A N/A N/A N/A
Brazil (NTN-F and LTN)

National treasury Brazilian real (BRL) Scripless BRL1,000
Chile BTP
National treasury Chilean peso (CLP) Scripless CLP5.0m
Colombia TES
Finance ministry Colombian peso (COP) Scripless COP500,000 From 6 months to 14 years Fixed Anual Bullet NL/365 COP98.2trn Dutch COP500bn Biweekly Pension funds, local Banks, and brokerage houses T+0 SEN/MEC/OTC 8.00-16.00 Yield up to 2 decimal places 2bp COP5.0bn COP5.0trn T+0 SEBRA/DECEVAL Pension funds, local banks, brokerage houses, and foreign investors
Mexico Bonos M
United Mexican States (UMS) Mexican pesos (MXN) Scripless MXN100 3, 5, 10, 20, and 30 years Fixed-rate Semiannual Bullet Actual/360 MXN1.55trn Single rate MXN4.5bn weekly
Peru Soberanos
Finance ministry Peruvian Sol (PEN) Scripless PEN10 From 1y to 31 years Fixed Semiannual Bullet 30/360 PEN26bn Dutch
Uruguay Notas del Tesoro in UYU

Finance ministry UYU Scripless UYU1 3-8years Coupon Semiannual Bullet 360 UYU11bn No schedule N/A N/A N/A N/A OTC/BVM/BEVSA 10.00-17.00 Yield up to two decimal places 5bp//5pips UYU20m (USD1.1m) UYU5m (USD260k) T+0, T+1, T+2 BEVSA/BVM/BCU Pension funds, local banks, insurance companies, brokerage houses, and foreign investors None Local custodian required, final custody on BCU No
1-10 years (NTN-F) 1-2 years 5- to 10-years (LTN) Fixed (NTN-F) Zero (LTN) Semiannual (NTN-F) zero (LTN) Bullet Business days/252 BRL534bn Yankee Per month: BRL15bn (LTN), 4bn (NTN-F) Weekly (LTN), 2/month (NTNF) Brokers and banks T+1 6% Semiannual Bullet Actual/360 CLP 1.1trn Dutch CLP20.0m Monthly Banks, pension funds, insurance companies, and mutual funds Dutch Exchange or OTC 9.30-13.30 Yield Semi Act/365 5bp CLP1bn CLP 20bn T+0, T+1, T+2 DCV Pension funds, banks, mutual funds, insurance companies, stockbrokers
Weekly (different tenors each Monthly week) Banks, local funds, individuals. Banks, market makers Foreign accounts through local Banks. T+2 T+1 OTC 7am to 2pm Yield up to 2 decimal places 2-4bp MXN50m MXN7-11bn Usually T+2 Local/Euroclear Local banks and funds, foreign real money funds and hedge funds. Datatec 10am to 1pm local time Yield up to 2 decimal places 8-10pips PEN15m PEN150m T+1 CAVALI Banks, AFPs, and foreign investors
OTC (MAE)/MERVAL OTC/BM&F 9am-4pm 9am-6pm Dirty price to 2 decimal places Yield up to 2 (sometimes 3) decimal places 25-50bp 1-3bp ARS5.0m BRL10m USD40m BRL 3bn for LTN, 1.3bn for NTN-F Usually T+3 T+0 Caja de Valores/Euroclear Selic Local and foreign banks, Local asset managers, foreign investors, insurance foreigners, local banks companies, individuals, and corporations
Regulations for foreign investors Restriction on foreign investment Custodian Interest income tax Capital gains tax Entry/exit
Source: HSBC
Need to open local custody with Need to open a trading account Not restricted FX restriction: 30% deposit in a CB registration required tax ID with an appointed administrator central bank account at 0% interest for one year Local custodian required Local custodian required (Selic) Local custodian required Local or Euroclear No No No Exempt Only if holding is less than 30 days IOF and CPMF Capital gains (CG) and Yes withholding (WHT) tax 35%, bonds issued from 2010 Yes 0% 4% of the interest received No
None Local custodian required
Exempted when tax treaty exist, No if not 0.5% No No No No
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No No
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Emerging Market Central Bank Monitor

Market-implied path of monetary policy rates for key EM countries
An important tool to assess investment opportunities in local markets is HSBCs EM Market Central Bank Monitor. It provides the market-implied path of monetary policy rates for key EM countries globally. Initially, we are covering Brazil, Chile, Czech Republic, Hungary, India, Israel, Korea, Malaysia, Mexico, Poland, South Africa, Taiwan, Thailand, and Turkey. The horizon covers the monetary policy segment of the yield curve, ie the next 24 months. We compute probabilities of a given move and provide a history of implied policy moves (see the table at the bottom of this page). This report is available as a download from Bloomberg (HSBCnet on Bloomberg: HSER <GO>) and the HSBC Global Research Web site at about 11am London time daily. It uses closing Asia prices, opening London prices, and last close
New York. We consider the report a useful tool in generating trade ideas in local markets. We use consistent bootstrapping and interpolation methodology to derive all curves, accommodating specific market conventions and using the mostliquid instruments for each market. Market-implied future central bank rates are computed from implied forward rates, ie we compute a strip of forward-starting short rates with start date on effective date following each future central bank meeting. Forward rates are derived from local interest rate curves where available (and cross-currency swaps in a few cases). Our approach yields a meeting-by-meeting path of implied rate moves, rather than cumulative implied moves over a specific time horizon (eg hikes over the next three months). The following table provides a glimpse of our Monitor for Latin America. In addition, it has implied probabilities for a set of cumulative implied changes per meeting.
Latin America: Implied rates, implied changes, cumulative implied changes Brazil Meeting 20-Apr-11 8-Jun-11 20-Jul-11 31-Aug-11 19-Oct-11 30-Nov-11 19-Jan-12 1-Mar-12 12-Apr-12 31-May-12 12-Jul-12 30-Aug-12 11-Oct-12 29-Nov-12 17-Jan-13 28-Feb-13
Source: HSBC
Implied Implied Cum. implied rate change change (%) (bp) (bp) 12.40 12.59 12.81 12.97 13.09 13.16 13.20 13.22 13.22 13.21 13.18 13.13 13.07 12.98 12.85 12.85 65 19 22 16 12 7 5 2 0 -2 -3 -5 -7 -9 -13 0 65 84 106 122 134 141 145 147 147 146 143 138 132 123 110 110
Chile Meeting 17-Mar-11 12-Apr-11 12-May-11 13-Jun-11 13-Jul-11 16-Aug-11 16-Sep-11 17-Oct-11 17-Nov-11 19-Dec-11 19-Jan-12 20-Feb-12 20-Mar-12 20-Apr-12 21-May-12 21-Jun-12
Implied Implied Cum. implied rate change change (%) (bp) (bp) 3.71 3.8 4.11 4.41 4.82 5.02 5.35 5.48 5.6 5.69 5.81 5.9 5.94 5.95 5.98 6.01 21 9 32 29 41 20 33 13 12 9 12 9 4 1 2 3 21 30 61 91 132 152 185 198 210 219 231 240 244 245 248 251
Mexico Meeting 15-Apr-11 27-May-11 8-Jul-11 26-Aug-11 14-Oct-11 2-Dec-11 20-Jan-12 2-Mar-12 15-Apr-12 4-May-12 6-Jul-12 24-Aug-12 12-Oct-12 30-Nov-12 11-Jan-13 22-Feb-13
Implied rate (%) 4.53 4.64 4.80 4.89 5.03 5.28 5.49 5.63 5.76 5.84 6.07 6.25 6.42 6.59 6.74 6.89
Implied Cum. implied change change (bp) (bp) 3 11 17 8 14 25 21 14 14 8 23 18 17 17 15 14 3 14 30 39 53 78 99 113 126 134 157 175 192 209 224 239
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Market profiles
Emerging Markets Argentina March 2011
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Argentina
Argentinas public debt in the hands of private investors accounts for
only 18% of GDP, according to our estimates

Even though activity in CER-linked paper has been picking up, foreign
investors are mostly involved with the USD-denominated segment of the market
Argentina has not issued for cash in international debt markets since 2001
Market structure
Official data as of September 2010 indicate that total public debt excluding bonds that were not presented in the 2005 and 2010 sovereign restructurings of defaulted debt amounted to USD160.9bn. Of this debt, 67.5% was under Argentine law and 32.5% under foreign law. Total public debt is mainly composed of bonds, 70%, of which 27ppt is ARS-denominated and 43ppt hard currency-denominated. Multilateral and bilateral debt (excluding Paris Club) accounts for 10% and temporary advances to the treasury from the central bank represents 6% of the total debt.
Following the nationalization of the private pension fund system in October 2008, the public sector ended up being the main holder of Argentine sovereign debt. We estimate that bonds held by private sector investors account for only 18% of GDP. In this local market guide, we focus on market debt issued under Argentine legislation, excluding restructured bonds. By market debt, we mean bonds either in private or public hands that can be traded in the secondary market and that are accessible to foreign investors. Of this group, 47% is denominated in USD (Bodens and Bonars), 28% inflation-linked (CER index), 25% floating interest rate Badlar-linked paper, and only 1% in nominal ARS (see Chart 11).
Chart 11. Argentine local debt composition (excluding restructured debt)
Chart 12. USD-denominated bonds issued under local legislation USDbn (excluding restructured debt)
22%
25%
6.4
4.4
0.7
1%
24% 28% ARS Badlar-linked USD Bodens

Source: Mecon
2.0
5.8 1.5 Boden 2013 Bonar V Boden 2015 Bonar X
ARS Nominal USD Bonars
ARS CER-linked
Boden 2012 Bonar V

Source: Mecon
10
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Table 2:.Argentina: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Yes Onshore interbank Yes Offshore investors with onshore No Onshore nonbank investor (eg custodian) with onshore Yes Eligible collateral for repos For CB repos CB bills, CB notes and bonds For interbank repos CB bills, CB notes and bonds Mark-to-market requirements Banks Yes Insurance companies Yes Pension funds N/A Mutual funds Yes Taxation: Government bonds Onshore investors No Offshore investors No Offshore investors access Foreign ownership of government bonds As % of outstanding N/A Direct purchase Yes Subject to cap No Registration requirement No Access to onshore funding Yes Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps, repo, futures) Yes Market liquidity statistics Daily turnover (ARSbn) 1.4 Buying volume in a single day (USDm) with 1.0 minimal market impact Bid/offer spreads under normal conditions (bp) 25-50
Source: HSBC
Recent developments
The Argentine bond market has been dominated by three events: the 2001 debt default (and the subsequent debt exchanges of 2005 and 2010), the nationalization of the local pension-fund system in 2008, and questions about the accuracy of inflation calculation. The first event constrained the governments access to international capital markets, and the others had a strong impact on the liquidity of local debt and the process of de-dollarization of liabilities. Lacking access to foreign debt markets, the government has resorted to service external debt owed to multilateral and private creditors with foreign reserves from the Banco Central de la Repblica Argentina (BCRA). For this, the government has issued an IOU to the bank for USD6.6bn in 2010, and repeated that this year for USD9.6bn. While access to voluntary capital markets abroad remains constrained by potential attachment due to lawsuits of holders of defaulted debt, we see increasing prospects that the government may attempt to issue new debt for cash next year. Financing costs have dropped from almost 16% in mid-2010 to a current Boden15 yield of close to 9%.
Key policy rates

Reverse repo rates (pases pasivos) of three and seven days are set by the central bank as one of the tools to manage the monetary base and comply with the monetary program. A reverse repo consists of the temporary sale of government paper to control the quantity of money. The difference between the price at which the central bank sells and buys the bonds is the rate that financial institutions get for the repo. The three- and seven-day reverse repo rates are currently set at 9.0% and 9.5%, respectively.
Monetary policy
The BCRA does not pursue an explicit inflation target, although its charter indicates the ultimate goal of the institution is to preserve the value of the ARS. For this, the BCRA targets the quantity of money supply based on quarterly objectives for M2. Central bank bills and notes Lebacs and Nobacs are issued on a weekly basis to control high-power monetary aggregates. The central bank also uses repos and reverse repos with private and public banks to contract or expand the monetary base.
11
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HSBC provides indicative prices for Argentine domestic government debt securities via Bloomberg page HSAR.
Chart 13. Debt profile of public bonds
USDbn 16 14 12 10 8 6 4 2 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Amortizations
Source: Mecon
Bonds
The Argentine local debt market includes a variety of different types of instruments. The range includes both ARS- and USD-denominated paper; inflation and Badlar-linked treasury debt, and central bank paper. Foreign investors are mostly active in USDdenominated Boden 2015. The new Global 2017, which was issued after the reopening of the exchange in June 2010, failed to become the benchmark on the belly of the curve, given its thin liquidity. Inflation-linked and Badlar-linked paper is usually much less liquid than USD-denominated local bonds. Yet domestic investors, mainly local banks, are active in this type of instruments. Following the nationalization of the pension fund system, the social security agency Anses became a key player in the local market. In terms of trade quoting, with exception of bonds issued under the sovereign restructuring Pars, Discounts, and Global 17s all instruments are quoted on a dirty, or all-in, price basis.
USD-denominated local debt
Interest
Local fixed income instruments

Argentina defaulted on its bonded external and domestic debt at the end of 2001. Since then, the government has not issued for cash in the international bond markets due to risks of attachment by holders of defaulted debt. Until now, Argentina has exchanged 92% of its defaulted bonds for new, current bonds through two exchanges in 2005 and 2010. Still, about US4bn of defaulted debt has not been tendered. In 2005, the government exchanged defaulted debt in multiple currencies for USD- and ARS-denominated Pars (no face value haircuts, but very low coupon) and Discounts (67% face value haircut, but higher coupon). Also ARS-denominated Quasi-Pars were issued for local pension funds only. Investors also received one unit of USD or ARS GDP warrants (see below) per unit of tendered debt (see below). A second tranche of the exchange was reopened in 2010 under similar conditions, and investors also received Global 17s as a compensation for past-due interest. Considering the restrictions regarding access to international debt markets, the government accessed foreign investors via the issuance of Bonars. These local-law bonds were denominated in both ARS and USD. Yet since early 2007, by the time market participants started to question the accuracy of the consumer price index reading, the government stopped issuing Bonars.
Boden 2012 Amount outstanding: USD4.3bn. Maturity: 3 August 2012. Amortization: Annual installment of 12.5% of face value. Coupon: Six-month Libor rate, paid on a semiannual basis. Bonar V, VII, and X Amounts outstanding: USD1.5bn, USD2.0bn, and USD6.85bn, respectively. Maturity: 28 March 2011, 12 September 2013, and 17 April 2017, respectively. Amortization: Bullet. Coupon: 7% fixed, paid on semiannual basis.
ARS CER-linked paper
The CER (coeficiente de estabilizacin de referencia) is an index produced by the BCRA. The index shows the daily evolution of consumer prices calculated as a geometric mean using as input the monthly CPI as reported by the national statistics agency INDEC.
12
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Badlar-linked instruments
Bogar 18 Amount outstanding: ARS13.64bn. Maturity: 4 February 2018. Amortization: 60 monthly installments of 0.40%, 48 monthly installments of 0.60%, 47 monthly installments of 0.98%, and a last installment of 1.14% of the CERadjusted capital, including capitalized interest up to 4 September 2002, starting on 4 March 2005. Coupon: 2% annual rate, paid on a monthly basis, based on CER-adjusted capital (ACT/365). Interest was capitalized until 4 September 2002. The first payment took place on 4 October 2002. Guaranty: Federal taxes under the tax-sharing program with provinces. Boden 14 Amount outstanding: ARS7.44bn. Maturity: 30 September 2014. Amortization: Eight semiannual installments of 12.5% of CER-adjusted capital, starting on 31 March 2011. Coupon: 2% annual rate, paid on a semiannual basis, based on CER-adjusted capital (ISMA-30/360). Bocon PR12 Amount outstanding: ARS1.6bn. Maturity: 3 January 2016. Amortization: 119 monthly installments of 0.84% and one final monthly installment of 0.04% of the CERadjusted capital, including capitalized interest up to 3 January 2006, starting on 3 February 2006. Coupon: 2% annual rate, paid on a monthly basis, based on CER-adjusted capital (30/360). Interest was capitalized until 3 January 2006. The first payment took place on 3 February 2006. Bocon PRE9 Amount outstanding: ARS293.5m. Maturity: 15 March 2014. Amortization: 70 monthly installments of 1.35% and two final monthly installments of 1.375% of CERadjusted capital, including capitalized interest up to 15 March 2008, starting on 15 April 2008. Coupon: 2% annual rate, paid on a monthly basis, based on CER-adjusted capital (30/360). Interest was capitalized up to 15 March 2008. The first payment took place on 15 April 2008.
The Badlar (private banks) rate is the average rate among private banks for 30- to 35-day certificates of deposit of ARS1.0m or higher. The central bank publishes this on a daily basis. Bocan 2014 Bocan paper was issued in an exchange of guaranteed loans (prstamos garantizados nacionales). Amount outstanding: ARS6.36bn. Maturity: 30 January 2014. Amortization: Bullet. Coupon: Badlar private banks rate +275bp, quarterly payments starting 30 April 2009. The coupon rate from issue to 30 January 2010 is 15.4%. The Badlar private banks rate is calculated as a simple average of the daily reported rate by the central bank from 10 days before the beginning of the coupon to 10 days before the payment of each coupon (same for Bocan 2015). Bocan 2015 Amount outstanding: ARS10.84bn. Maturity: 10 September 2015. Amortization: Six semiannual installments (five of 16.66% and a last one of 16.70%) of the issued amount, starting on 10 March 2013. Coupon: Badlar private banks rate +300bp (ACT/365), quarterly payments starting 10 December 2010.
GDP warrants
Even though formally the GDP warrants are not considered a pure fixed-income instrument, foreign investors trade this paper as part of their bond portfolio. ARS-USD warrants Issue date: 31 December 2003. Maturity: 15 December 2035 or earlier. Coupon: Paid annually, based on the notional amount of the warrant. The payment will take place on 15 December of the following relevant reference year if the following three conditions are met: 1) The level of real GDP has to exceed the base-case GDP. The base case was established by the government at the time of issuance and determines a specific real GDP growth-rate path. 2) Real GDP growth has to exceed the growth rate corresponding to the base-case GDP. 3) Accumulated past payments should not exceed 0.48 per notional unit. The payment amount corresponds to 5% of the
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Settlement
With the exception of internal central bank bills and notes, all Argentine paper, either local or external, is cleared both locally and via Euroclear and Clearstream.
difference between actual real GDP measured in ARS and the base-case GDP.
Derivatives
The onshore interest fixed rate swap (IRS) market is limited to Badlar versus fixed rate. Maturities are due in March, June, September, and December with tenors ranging from six months to two years. Yet most liquid contracts are 1.5 years and shorter. Most active players in this market are local banks, with an average ticket of ARS10m.
Taxation
Taxes in the form of VAT, capital gains, or income tax do not apply to transactions in Argentine fixed income instruments.
Foreign exchange
For details on FX markets, please see HSBCs Emerging Markets Currency Guide 2011: A guiding light, 19 January 2011.
Table 4. Normal market conditions Onshore average daily volume Onshore spot transaction Onshore bid/ask spread Onshore forward transaction Onshore forward spread Offshore average daily volume Offshore bid/ask spread Implied option volatility spread
Source: HSBC
Regulatory, settlement, and tax issues

Regulation
Free capital movement is restricted by regulation. Foreign investors bringing foreign exchange at the spot exchange rate into the Argentine capital markets are required to make a 30% deposit at zero interest rate in a central bank account for a one-year period. An alternative vehicle used by investors consists of the following operation. Most fixed income instruments, ie ARS-Discounts, are quoted in both USD and ARS and can be traded both domestically and offshore. The operation in which an investor buys a bond in USD offshore and sells it in ARS in the domestic market or vice versa results in inflows of ARS (outflows of USD).The implied exchange rate, the ratio of the USD to ARS price of the selected instrument, is called the blue-chip swap (BCS). When engaging in this type of operation, investors are exposed to the BCS and not the official spot exchange rate. Regulation has become tighter to limit this type of operation. For example, there is a minimum required period of 72 hours after settlement in the local custodian, Caja de Valores, for investors to require the change to Euroclear custodian. As the usual settlement of Argentine bonds is T+3, a minimum of six working days is necessary for the bonds to be under a Euroclear custodian.
USD600m USD5.0m ARS0.001 USD300m ARS0.0025 USD100m ARS0.0025 6-month 2 vols (USD 20m)
Useful links
Table 5. Information sources Central Bank of Argentina www.bcra.gov.ar Ministry of Economy (MECON) www.mecon.gov.ar National Bureau of Statistics (INDEC) www.indec.gov.ar Electronic open market (MAE) www.mae.com.ar Official gazette www.boletinoficial.gov.ar Buenos Aires stock exchange www.bolsar.com Argentina Securities and Exchange Commission (CNV) www.cnv.gov.ar HSBC Argentina Bloomberg page HSAR <GO>
Source: HSBC
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Table 6. Argentina: Bonds Treasury bonds (USD) Issuer Currency Form Minimum denomination Tenors Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Economy ministry US dollar (USD) Physical USD1 1 to 30 years Fixed/floating Semiannual See text 30/360 USD69.4bn No schedule N/A N/A N/A N/A OTC (MAE)/Merval 9am-4pm Clean price to 2 decimal places 25-50bp USD3.0m USD40m Usually T+3 Caja de Valores/Euroclear Local and foreign banks, foreign investors, insurance companies, individuals, and corporations Treasury bonds (ARS- and CPI-linked) Economy ministry Argentine peso (ARS); US dollar (USD) Physical ARS1 1 to 30 years Fixed Ad hoc See text 30/360* USD44bn No schedule N/A N/A N/A N/A OTC (MAE)/Merval 9am-4pm Dirty price to 2 decimal places 25-50bp ARS5.0m USD40m Usually T+3 Caja de Valores/Euroclear Local and foreign banks, foreign investors, insurance companies, individuals, and corporations FX restriction: 30% deposit in a central bank account at 0% interest for one year Local custodian required No No No Central bank bills (Lebacs) Argentine central bank Argentine peso (ARS) Physical ARS1 Up to one year Zero Zero Bullet Actual/365 ARS47.3bn Dutch (one price) ARS1.0bn Usually Tuesdays Local banks, insurance companies, and mutual funds T+1 OTC (MAE)/Merval 9am-4pm Dirty price to 2 decimal places 1-5bp ARS10m USD160m T+1 Caja de Valores Local banks, insurance companies, and mutual funds Central bank notes (Nobacs) Argentine central bank Argentine peso (ARS) Physical ARS1 Up to 3 years Badlar + 250bp Quarterly Bullet Actual/actual ARS25.8bn Dutch (one price) ARS1.0bn Usually Tuesdays Local banks, insurance companies, and mutual funds T+1 OTC (MAE)/Merval 9am-4pm Dirty price to 2 decimal places 1-5bp ARS10m USD160m T+1 Caja de Valores Local banks, insurance companies, and mutual funds
Regulations for foreign investors Restriction on foreign investment FX restriction: 30% deposit in a central bank account at 0% interest for one year Custodian No Interest income tax No Capital gains tax No Entry/exit No
* 30/360 in most cases Source: HSBC
Foreign investors are not allowed Foreign investors are not allowed to hold central bank paper. to hold central bank paper. Local custodian required No No No Local custodian required No No No
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Emerging Markets Brazil March 2011
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Brazil
Brazil has the largest local market in Latam by market capitalization; this
is a well-developed and deep market with some idiosyncrasies

Local bonds and CDI swaps are the most relevant instruments for
foreigner investors
Recent developments, mainly the IOF tax, have tempered investors
appetite for Brazilian local debt, but Brazil still offers some of the highest real yields in EM
Market structure
Brazil continues to attract significant interest from international investors, not least because its local market provides some of the highest real yields available in fixed income. At the same time, Brazils fixed income market is comparatively deep and well-developed in terms of available instruments and liquidity. The main yield curves used in Brazil are derived from the futures markets, rather than the government bond market. DI futures are among the most actively traded instruments in the local curve, and foreign investors can access them through offshore CDI swaps. As of November 2010, the local government bond market had about USD930bn in notional held by the public the central bank is holding an additional USD420bn in domestic government debt and this was
Chart 14. Local debt composition (by notional held by public)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: National Treasury Brazil
more than 20 times larger than the external debt market of approximately USD42bn. About USD7bn of Global BRL bonds are outstanding, which provide investors that have no access to local debt instruments in Brazil with exposure to Brazilian local yields. Over the past 10 years, Brazils local government debt profile has changed significantly (see Chart 14). In November 2010, Brazil had nearly eliminated USDlinked local debt, from a share of more than 20% of nominal debt held by the public in 2000. Fixed rate debt increased from less than 10% to more than 37% over the same period. Inflation-linked debt also has taken on a much stronger role in Brazils debt management strategy, with its share rising from less than 6% in 2000 to 28% now. Floating rate debt still plays a large role, at 34%, but its share has declined sharply over the years from more than 60% 10 years ago. This duration
Chart 15. Government bonds maturity profile
FX-Exchange
+10yr up to 1yr
Floating rate
5-10yr
Inflation Linked
3-5yr
Fixed rate
1-3yr
Source: National Treasury Brazil, HSBC
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Table 7. Brazil: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Yes Onshore interbank Yes Offshore investors with onshore No Onshore nonbank investor (eg custodian) w/ onshore No Eligible collateral for repos For CB repos Local sovereign bonds For interbank repos Local sovereign bonds Mark-to-market requirements Banks Yes Insurance companies N/A Pension funds N/A Mutual funds Yes Taxation: Government bonds Onshore investors Capital gain tax bracket from 22.5% to 15% depending on holding period Offshore investors Exempt from capital gains unless from tax haven, 6% IOF upfront Offshore investors access Foreign ownership of government bonds Yes As % of outstanding c12% Direct purchase Only through banks Subject to cap Yes Registration requirement Yes Access to inshore funding No Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps, repo, futures) Yes Market liquidity statistics Daily turnover Buying volume in a single day (USDm) with minimal market impact Bid/offer spreads under normal conditions (bp)
Source: HSBC
extension of Brazils domestic debt stock has helped reduce local market volatility and made debt service more predictable. Nonetheless, there is still a long way to go, as more than 60% of Brazils local debt is in maturity buckets of less than three years (see Chart 15).
Recent developments
The IOF tax, an upfront entry tax on foreigners investments in fixed-income securities, was raised to 6% from 2% in October 2010 (equity investment still incurs the 2% levy). This measure has significantly reduced foreign inflows into the domestic market. As of January 2011, foreign domestic debt participation stood at 12%. However, the average number understates the concentration of foreign ownership in certain fixed-rate and inflation-linked bonds. Nonetheless, the share is low overall, compared to the peer group in Latam (with the exception of Colombia). Domestic debt financing strategy continues to target an increase of the share of fixed-rate and inflationlinked bonds, with an implicit gradual increase of the duration of federal debt outstanding. Pension fund regulation was altered in 2009 by raising state and municipal pension funds minimum allocation in fixed rate funds to 70%. They need to adjust to the new parameters by June 2011.
6.5bn BRL: LTNs 3.0bn, NTNBs 1.8bn, NTNFs 1.3bn 50-100 1-3 depending on maturity
The Copom also can establish a monetary policy bias at its regular meetings; a bias to ease or tighten authorizes the BCB governor to alter the Selic interest rate target in the direction of the bias anytime between regular Copom meetings. The Copom is composed of the members of the BCB board of directors: the central bank governor and the deputy governors of monetary policy, economic policy, special studies, international affairs, financial system regulation, financial supervision, bank privatization and administration. The BCB governor holds the deciding vote whenever there is a split decision on monetary policy. Eight days following each Copom meeting, the BCB releases the meeting minutes. The effective Selic rate is an average of all rates traded during the day. This rate is annualized using 252 business days (exponentially compounded) and can be tracked through Bloomberg ticker BZSELICA.
Monetary policy
The Banco Central do Brasil (BCB) conducts an inflation-targeting regime. The inflation target is currently 4.5%, with a 2% tolerance interval on either side of the target, and measured relative to the IPCA inflation index. The BCB regulates liquidity in the financial system by conducting daily open-market operations. Copom, the monetary policy committee, is responsible for monetary policy and for setting the short-term interest rate. To that effect, Copom meets on scheduled dates, currently eight times per year, to determine the target for the interest rate for overnight interbank loans collateralized by government bonds registered with and traded on the Sistema Especial de Liquidao e Custdia (Selic).
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BRL Selic-indexed floating-rate debt securities

Bonds
Federal government debt is issued by the treasury, which manages both external and domestic debt. The BCB may intervene in the government debt securities secondary market for monetary or foreign exchange policy purposes, by means of auctions or repurchase agreements. Domestic government debt securities today are mainly denominated in BRL and bear fixed- or floating-rate coupons. Additionally, there is a large portion of inflation-linked debt. The National Association of Financial Market Institutions (Andima) posts secondary market prices for the main federal domestic securities collected from the most active market participants. Daily secondary-market trading volume for specific securities is published weekly in the Open Market Report published by the BCB. HSBC provides executable prices for Brazilian domestic government debt securities via Bloomberg page HSBS.
BRL fixed rate debt securities
The government debt security with the greatest volume outstanding is the financial treasury bill LFT. LFTs bear floating-rate interest based on the Selic interest rate, the benchmark rate in the fixed income market. National treasury is currently holding weekly formal auctions for LFTs. Interest: Floating, indexed to the Selic interest rate. Coupon: Zero coupon. Amortization: Bullet at maturity. Tenor: Variable tenors, generally five years, subject to market conditions. Volume outstanding (January 2011): BRL530bn.
BRL inflation-linked floating rate debt securities
National treasury has two types of BRL inflation-linked debt securities. The C-series national treasury note (NTN-C) is indexed to the IGP-M inflation index. Currently NTN-Cs are not issued any longer. Interest: Floating, indexed to the IGP-M inflation index. Coupon: Semiannual. Amortization: Bullet at maturity. Tenor: Originally long term. Volume outstanding (January 2011): BRL64bn. B-series national treasury note (NTN-B) is indexed to the IPCA inflation index, the yardstick for the inflationtargeting regime, and is the most actively traded, inflation-linked government debt security. Interest: Floating, indexed to the IPCA inflation index. Coupon: Semiannual. Amortization: Bullet at maturity. Tenor: Long term, currently between two and 40 years, subject to market conditions. Volume outstanding (January 2011): BRL382bn.
USD-linked fixed-rate debt security
LTN (national treasury bills): This is currently the security with the greatest secondary-market liquidity. National treasury is currently holding weekly formal auctions for LTNs. Interest: Fixed. Coupon: Zero coupon. Amortization: Bullet at maturity. Tenor: Generally between six months and two years, subject to market conditions. Volume outstanding (January 2011): BRL291bn. NTN-F (national treasury note): Interest: Fixed. Coupon: Semiannual. Amortization: Bullet at maturity. Tenor: Generally between five and 10 years, subject to market conditions. Volume outstanding (January 2011): BRL236bn.
National treasury can also issue USD-linked, fixed-rate domestic securities, the most relevant of which recently was the D-series national treasury note (NTN-D). NTN-Ds are settled in BRL and the USD/BRL fixing rate is the PTAX of the business day immediately before the maturity or interest coupon date. Currently, no NTN-Ds are outstanding, and there are no plans to resume issuance.
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On the trade date, the trading price P per contract is calculated as follows (in BRL):
Global BRL bonds
Though global BRL-denominated bonds are legally external debt, they have become popular with international investors, because these provide exposure to local rates without being subject to access constraints and taxes associated with domestic debt instruments. Hence, global BRL bonds trade at a significantly lower yield than their domestic counterparts. Coupon: Semiannual, currently 10.25% (BRL Global 2028) and 12.5% (2016 and 2022). Amortization: Bullet at maturity. Settlement: Settled in USD according to PTAX rate two business days prior. Tenor: Long-term, current maturities between 2016 and 2028 outstanding; treasury plans to issue more. Volume outstanding (January 2011): BRL11.3bn.
P0 =
100,000 i 1 + 100
BD 252
where i = the traded interest rate of the contract, BD = the number of business days between trade day and the day before the expiration date of the contract. On any
DI St = SP t SP t 1 1 + t 1 100
252
given day after the trade date, the contract is settled as daily settlement amount S as follows (in BRL): where SP is the settlement price of the contract and DI is the CETIP-DI rate corresponding to the business day preceding the settlement. The CDI accrual factor between any two dates is published on the CETIP website.
Derivatives
The main yield curves used in Brazil are derived from the futures markets, instead of from the government bond market or swap curves as usual.
Interest rate swaps

The most common interest rate swap in Brazil is the CDI swap, also known as Pre/DI swap. Both swap legs are denominated in BRL. The fixed leg is a predetermined interest rate, typically the yield level on the trade date of the contract that matches the maturity of the CDI swap. The floating rate depends on the daily evolution of the CDI, which is exponentially compounded on a daily basis according to the business day/252 convention. There is no upfront or intermediate cash flow during the life of the swap. In the onshore market, the P/L is settled at maturity in BRL. For offshore CDI swaps, settlement occurs in USD using the PTAX rate. Liquidity in CDI swaps is largest for the most actively traded DI futures contracts. Note that there is an onshore/offshore spread for CDI swaps traded offshore, which currently varies between 3-25bp depending on tenor but can change depending on market conditions.
DI futures
The accumulated DI-CETIP overnight interbank interest rate is the underlying asset for the DI futures traded on the BM&F Bovespa exchange. Liquidity is significant, with an open position of more than 10m contracts as of March 2011. Given that the nature of the DI-CETIP interest rate is almost identical to that of the Selic rate, DI futures contracts are an effective indicator of the market outlook for the results of coming Copom meetings. The domestic BRL yield curve is predominantly derived from the DI futures contracts. CDI futures are monthly futures with contract maturities covering the next four months and quarterly cycle months thereafter (January, April, July, and October). The bulk of the liquidity is in January futures, followed by the July futures; in terms of tenors, DI futures are traded out to 10 years, but liquidity is concentrated up to two years and then falls gradually. Contract size is BRL 100,000. Each contract stops trading on the last business day of the month proceeding the contract month and settles on the second business day following the last trading day.
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Interest rate options
6-Jan-11 2-Jan-15 50,000,000 12.05% 1,005 31,762,216 17-Feb-11 2-Jan-15 50,000,000 12.54% 975 1.01247359 (31,656,371) 32,158,405 502,034 1,005 2.1062 0.9231 (50,000,000) 50,792,944 792,944 376,481 347,541
Table 8. CDI swap valuation (example) Trade settlement date Maturity date Notional (BRL) Fixed rate (pay) Business days to maturity PV (BRL) Unwinding the swap Unwind date Maturity date Notional (BRL) Unwind rate Remaining business days CDI accrual Onshore fixed leg PV (BRL) Onshore floating leg PV (BRL) Onshore P&L (BRL) Total business days USD-BRL forward USD discount factor Offshore fixed leg FV (BRL) Offshore floating leg FV (BRL) Offshore FV P&L (BRL) Offshore FV P&L (USD) Offshore PV P&L (USD)
Source: HSBC
Interest rate options in Brazil are traded as options on DI futures and in the form of IDI options. Both are different conceptually. Options on DI futures are European options on DI futures contracts. In the onshore market, these options trade on the BM&F, and in the offshore market, investors can enter OTC CDI swaptions. Option expiries are typically any of the regular DI futures cycle months (January, April, July, and September), typically up to one-two years out. Maturities are the same cycle months, typically three to 12 months after expiry, but theoretically longer, as well. January and July tend to be the most liquid maturities, the same as with the underlying DI futures. Liquidity has already improved over time, but it is still a nascent market. The last trading date in a CDI swaption is the last business day of the month immediately before the contract month. Premium, daily adjustment and margin requirements are settled on the next business day. IDI options are options on the IDI index, a one-day average DI index tracking the daily return of the DI rate. Thus, IDI options are effectively options on the average short-term rate over the transaction period. They are European-style calls or puts, traded on the BM&F, and have multiple contract months as maturity dates.
Other swaps and derivative instruments

Cupom cambial (DDI-futures) are futures contracts on the FX-adjusted DI rate. The underlying asset is the spread between the interest rate obtained from the difference between the accumulated daily DI rates realized from the trade date to the last trading day, and the corresponding variation in the PTAX rate from the day before the trade date to the last trading day. Cupom FRA or FRC is a forward rate agreement on onshore USD rates, traded on the BM&F. The contract has been designed to blend out CDI and FX risk. It effectively consists of two DDI contracts, one maturing in the first DDI month (short leg) and the second one in the DDI month identical to the FRC traded month (long leg). Cupom-CDI swaps are cross-currency swaps with a fixed-rate, USD-indexed leg and a floating-rate CDI leg (in BRL). Other derivatives include inflation-linked swaps, ie the IGP-M/CDI swaps and the IPCA/CDI swap. However, none of these has any meaningful liquidity now.

Regulation
The Foreign Capital Law defines foreign capital as any cash funds that belong to foreign individuals or legal entities that enter Brazil for use in economic activities: investment in domestic securities and derivatives, foreign loans to Brazil, and foreign direct investment. Registration of foreign capital with the Brazilian Central Bank (BCB) is required and is essential for capital repatriation and profit remittance or reinvestment.
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Tax on financial activities (CPMF), which is not in effect currently. Tax on financial transactions (IOF). The IOF tax was reintroduced at a flat rate of 2% in October 2009 for fixed income and equities. This rate was raised in October 2010 to 6% for new inflows into fixed income only.
The most common type of foreign investment in securities and derivatives is governed by National Monetary Council (CMN) Resolution 2689. Eligible securities and derivatives include fixed-income debt securities and derivatives (exchange and OTC), such as futures, swaps, and options.
Settlement
All securities and OTC derivatives must be registered in a custody and settlement system authorised by the BCB or the Brazilian Securities Commission (CVM) in their respective areas of authority. Offshore transfers of the ownership of these securities to other non-resident investors are not allowed, except in cases of inheritance or corporate reorganization (eg a merger). The HSBC Brazilian Financial Markets Handbook has a step-bystep of account opening procedures and account structures. Investors also may consult other sources such as the BM&F Web site.
Foreign exchange
Source: HSBC
Taxation
Regarding taxes on financial transactions for foreigners, it is essential to consult with legal and tax advisers to navigate individual circumstances. Broadly speaking, there are three kinds of taxes on financial operations in Brazil: Income tax with exemption for nonresident investors under certain circumstances.
USD9.1trn USD3-5m 5pips USD3-5m 5pips USD0.3bn outright, USD0.6bn swaps USD5m 1-month 1.5 vols
Useful links
Table 11. Information sources Brazil central bank Brazils Futures and Mercantile Exchange (BM&F) Brazil Ministry of Finance Brazils Securities and Exchange Commission CETIP (clearing house) National Association of Fin. Market Institutions HSBC Brazilian market page
Source: HSBC
www.bcb.gov.br www.bmf.com.br www.fazenda.gov.br www.cvm.gov.br www.cetip.com.br www.andima.com.br HSBS <GO>
Table 9. Brazil: Interest-rate swap (IRS) and cross-currency swap (CCS) markets Onshore IRS Nonresident access Tenors Yes BM&F first business day of each quarter (Jan, Apr, Jul, Oct) Liquid tenors Short end, Jan12, Jan13, Jan17 Average trade size USD10k DV01 Bid/offer spreads under normal conditions (bp) 1-3bps depending on the tenor Fixing rate CDI, published by Cetip. http://www.cetip.com.br Day count Business days/252 basis Effective date Fixing time (local time) Fixing page Local market hours Main participants Trading date O/N rate is published daily by Cetip at around 6pm Offshore IRS Yes BM&F first business day of each quarter ( Jan, Apr, Jul, Oct ) Short end, Jan12, Jan13, Jan17 USD10k DV01 1-3bps depending on the tenor CDI, published by Cetip. http://www.cetip.com.br Business days/252 basis Trading date O/N rate is published daily by Cetip at around 6pm Cupom/Cambial Yes BM&F first business day of each quarter ( Jan, Apr, Jul, Oct ) Short end USD10m 5bps CDI on the BRL leg, PTAX on the USD leg Business days/252 basis on the BRL leg, actual/360 on the USD leg Trading date O/N rate is published daily by Cetip at around 6pm, PTAX published by the Central Bank at around 6pm daily www.cetip.com.br, www.bcb.gov.br 9am-6pm Domestic market participants
www.cetip.com.br www.cetip.com.br 9am-6pm 9am-6pm Local banks, mutual funds, hedge funds, Local banks, mutual funds, hedge funds, foreigners, insurance companies, pension foreigners, insurance companies, pension funds funds
Source: HSBC
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Table 12: Brazil: Bonds NTN-F and LTN Issuer Currency Form Minimum denomination Tenors Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume daily Settlement Clearing Main participants Regulations for foreign investors Restriction on foreign investment Custodian Interest income tax Capital gains tax Entry/exit
NTN-B and NTN-C National treasury Brazilian real (BRL) Scripless BRL1,000 1-40 years IPCA linked (B), IGP-M linked (C) Semiannual Bullet Business days/252 BRL446bn Dutch BRL5bn per month Ad-hoc, currently 2/month Brokers and banks T+1 OTC/BM&F 9am-6pm Yield up to 2 (sometimes 3) decimal places 1-3bp BRL20m BRL1.8bn for NTN-Bs T+0 Selic Pension funds, foreigners
LFT National treasury Brazilian real (BRL) Scripless BRL1,000 1-5 years Zero Zero Bullet Business days/252 BRL530bn Dutch BRL7bn per month Weekly Brokers and banks T+1 OTC/BM&F 9am-6pm Yield up to 2 (sometimes 3) decimal places 1-3bp BRL45m BRL0.5bn T+0 Selic Local banks, money market funds
National treasury Brazilian real (BRL) Scripless BRL1,000 1-10 years (NTN-F) 1-2 years (LTN) Fixed (NTN-F) Zero (LTN) Semiannual (NTN-F) Zero (LTN) Bullet Business days/252 BRL 527bn Yankee Per month: BRL15bn (LTN), 4bn (NTN-F) Weekly (LTN), 2/month (NTN-F) Brokers and banks T+1 OTC/BM&F 9am-6pm Yield up to 2 (sometimes 3) decimal places 1-3bp BRL10m BRL 3bn for LTN, 1.3bn for NTN-F T+0 Selic Local asset managers, foreigners, local banks CB registration required Local custodian required (Selic) Exempt Only if holding is less than 30 days IOF and CPMF
CB registration required Local custodian required (Selic) Exempt Only if holding is less than 30 days IOF and CPMF
CB registration required Local custodian required (Selic) Exempt Only if holding is less than 30 days IOF and CPMF
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Emerging Markets Chile March 2011
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Chile
Chile is the third-largest domestic market in Latam It is one of only three markets in the region with a liquid swap market A key characteristic is the high degree of inflation indexation
Market structure
With more than CLP17trn (USD36bn) in local-currency domestic bonds outstanding, Chiles local government bond market is the third-largest in the region, after those in Brazil and Mexico. In terms of access, Chile ranks between those two markets, as access is easier in Chile than in Brazil but it requires more red tape than Mexico in terms of setting up custodial accounts. Liquidity is not as high as in Brazil and Mexico, partly because the local market is dominated by a very large system of pension funds (AFP), which tend to be buy-and-hold fixed-income investors. Because of all of these factors, foreign participation is surprisingly small in the Chilean domestic government bond market. One surprising characteristic of the market, given the countrys long history of inflation-targeting and relatively low rates of inflation in the past decade, is the high degree of inflation-linked government debt (see Chart 16), with BTU, BCU, and PRC the main inflationlinked instruments constituting more than 60% of all bonds outstanding (in terms of notional). The maturity structure of the domestic government bond stock is well-balanced, with a relatively long average maturity.
Another idiosyncrasy of the Chilean local market is that there are two issuers for government debt: the central bank and the finance ministry. In addition, Chile is one of only three markets with liquid swap markets, and together with Mexico, is only one of two Latam markets with a noteworthy inflationlinked swap market.
Recent developments
In 2010, in the aftermath of the earthquake, Chile came to the international capital markets for the first time since 2003. The sovereign issued USD1bn of a global dollar bond and, for the first time ever, a CLP-denominated global bond in USD0.5bn issue size. Both bonds are due in 2020. The governments stated strategy, in the Bicentennial Capital Markets Agenda, is to increase the depth and liquidity of the financial system and to provide wider access. In that sense, an increase in foreign participation through further Global CLP issuance appears likely. On the domestic bond side, recent legislation simplifies taxation of foreign investors in Chiles sovereign bonds.
Chart 16. Local debt composition

PRC 3% BCP 13%
Chart 17. Government bonds maturity profile

+10yr 14%
BTP 6%
up to 1yr 30%
Nominal
Inflation-linked
BTU 38%
PDBC 17%
5-10yr 25%
BCU 23%
3-5yr 13%
Source: HSBC, Bloomberg
1-3yr 18%
Source: HSBC, Bloomberg
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Table 13: Chile: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Yes Onshore interbank Yes Offshore investors with onshore No Onshore nonbank investor (eg custodian) with onshore No Eligible collateral for repos For CB repos Central bank bonds For interbank repos CB, treasury, corp bonds, bank bonds Mark-to-market requirements Banks Yes Insurance companies Yes, except LT hedging Pension funds Yes Mutual funds Yes Taxation: Government bonds Onshore investors General regime, no specific taxes Offshore investors 4% WHT, 35% capital gains, bond issued after 2010 with tax benefits without capital gains Offshore investors access Foreign ownership of government bonds Yes As % of outstanding c7% Direct purchase Through banks or stockbrokers Subject to cap No Registration requirement Yes Access to inshore funding No Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps, repo, futures) IRS Market liquidity statistics Daily turnover Buying volume in a single day with minimal market impact Bid/offer spreads under normal conditions (bp)
Source: HSBC
There is a continuing trend by the regulator to encourage local pension funds to invest abroad, which is part of the governments strategy to stem appreciation of the CLP. By September 2011, AFPs will be able to invest as much as 80% of their assets abroad.
Monetary policy
The Banco Central de Chile (BCCh) conducts an inflation-targeting regime. The inflation target is currently 3%, with a 1% tolerance interval on either side of the target, and measured relative to the CPI index, published by the National Institute of Statistics (INE). Maintaining inflation close to the target level is a perennial objective in a medium-term horizon of two years. Consistent with the adaptation of an inflationtargeting regime, the exchange rate band was abandoned in 1999 in favor of a free-floating regime. The BCCh implements its monetary policy by defining a target level for the nominal interbank interest rate (tasa de poltica monetaria, or TPM). To ensure that the interbank rate falls within the desired range, the central bank must regulate financial system liquidity (or reserves) through the use of several instruments: open market operations, buying and selling short-term promissory notes, and liquidity deposits and lines of credits (expanded facilities). These tools also include the banking reserve over deposits, although in practice the BCCh does not use this as an active monetary-policy instrument. Policy decisions are made at monthly meetings but can also be made at special meetings. Decisions are made by simple vote of board members present at each meeting, with the BCCh governor casting the decisive vote in case of a tie. The finance minister is allowed to attend the meetings, with a voice in deliberations and the ability to suspend for as long as 15 days the implementation of any resolution. Once this period has expired, and provided the majority of board members remain in favor, the boards decision takes effect with the simple publication of the resolution in the official gazette.
USD 300m, different bonds and tenors Depending on tenor, liquid tenors USD30m 5 for liquid tenors
The meeting minutes are made public five business days before the next scheduled meeting, or 15 days following the meeting, whichever comes first. The document reports the vote of each board member on the resolutions passed during the session. Another important element for the BCChs policy transparency is publication of the Monetary Policy Report every four months and the Financial Stability Report semiannually. The central bank board is composed of five members appointed by the president, with approval by the senate. These appointments last for 10 years. Members can be reappointed for another 10-year term, and positions are renewed every two years on a rotating basis. The board itself elects the vice governor from among its members, and this person remains in this position for the duration of his or her term. Both the governor and vice governor can be reelected.
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UF inflation-linked floating-rate debt securities

Bonds
The government issues peso- and UF-denominated bonds in the domestic market. These issues provide referential real and nominal interest rates for other domestic debt. Government debt includes the debt of the treasury department and the central bank. HSBC provides indicative prices for Chilean domestic government debt securities via Bloomberg page HSCH.
CLP fixed-rate debt securities
More than 60% of Chiles domestic government debt is inflation-linked. There are three types of inflationlinked bonds: BCU, issued by the central bank; BTU, issued by the treasury, more liquid by a relatively small margin, and PRC, also issued by the central bank, with coupon and redemption linked to the CPI. The accounting unit used for inflation indexation is called UF (unidades de fomento), and is published by the BCCh on a daily basis; see Bloomberg ticker CHUF. BCU (Bonos del Banco Central de Chile) are inflation-linked bonds issued by the BCCh and denominated in UF. Interest: Current issues 3%, before 2007 issued with 5%. Coupon: Semiannual, payable in CLP at the current CLP/UF rate. Amortization: Bullet at maturity. Tenor: 5-, 10-, and 20-year issues. Volume outstanding (February 2011): CLP4trn. BTU (Bonos de la Tesorera General de la Repblica en unidades de fomento) are inflation-linked bonds issued by the national treasury, also denominated in UF. Interest: Current issues 3%, with odd coupons between 2.1% and 4.5% for older issues. Coupon: Semiannual, payable in CLP at the current CLP/UF rate. Amortization: Bullet at maturity. Tenor: 5- to 30-year issues. Volume outstanding (February 2011): CLP6.3trn. PRC (Pagars reajustable Cupn) are sinking-fund, inflation-linked bonds issued by the central bank. Amortization: Sinking fund. Tenor: As long as 20 years. Volume outstanding (February 2011): CLP520bn.
Global CLP bonds
Less than 40% of Chiles domestic government debt is nominal fixed-rate. There are three types of nominal fixed-rate bonds: BCP, issued by the central bank; PDBC, zero-coupon bonds issued by the central bank; and BTP, issued by the treasury. BCP (Bonos del Banco Central de Chile en pesos) are fixed-rate peso bonds issued by the BCCh. Currently, 15 bonds are outstanding, and these are tapped or issued in regular auctions. Interest: 3%, 6% and 8%. Coupon: Semiannual. Amortization: Bullet at maturity. Tenor: 2-, 5-, and 10-year issues. Volume outstanding (February 2011): CLP2.3trn. BTP (Bonos de la Tesorera General de la Repblica en pesos) are fixed-rate peso bonds issued by the national treasury. Interest: 6%. Coupon: Semiannual. Amortization: Bullet at maturity. Tenor: 5- to 10-year issues. Volume outstanding (February 2011): CLP1.1trn. PDBC (Pagars Descontabes del Banco Central de Chile) are zero-coupon peso notes issued by the central bank. Interest: 0%. Amortization: Bullet at maturity. Tenor: 30, 90, 180, and 360 days. Volume outstanding (February 2011): CLP2.9trn.
Only one issue exists at present, the Global CLP 5.5% of August 2020, with CLP 272bn outstanding. Though formally counted as external debt, global CLPdenominated bonds provide access to local market yields. As in Brazil and Colombia, Global CLP bonds trade at a significant premium over the domestic bond curve.
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Another variant is the UF x Cmara swap, where the fixed leg becomes inflation-linked. UF x Cmara swaps are traded out to 20 years with bid-offer spreads of 20bp typically. There are significant hedging needs from corporate issuers, which are users of the instrument.
UF forwards
Derivatives
Chile has an active swap market, with both nominal and inflation-linked swaps, though liquidity in nominal swaps trading is somewhat thinner than that in Brazil and Mexico and rather limited in UF swaps.
Cmara swaps
The most common interest rate swap is the fixed for floating CLP x Cmara swap. The floating leg is called Cmara. It is an overnight rate that is compounded on a daily basis, and paid semiannually on an actual/360 basis against the fixed rate (except swaps with a tenor of less than one year, which are typically settled at maturity). The Cmara is calculated by taking the weighted average of the interbank rate and is published daily by the central bank. For the most part, the Cmara fix really represents the banks funding cost, so there is typically no or only a small basis to the monetary policy rate set by the BCCh. The Cmara rate can be monitored on Bloomberg using the ticker CHIBNOM. The compound index is called ICP and can be tracked on the Bloomberg ticker CLICP (based to September 2002). Liquidity goes from six months out to 10 years, but tends to be higher in the short end. Typical bid-offer spreads are 5bp but tend to go wider when volatility increases.
In the OTC market, one can buy or sell one UF unit at a future date. Prices are quoted on the Bloomberg page HSCH => Option 3. On the maturity date, the contract is settled by exchanging the difference between the price agreed at the trade date and the actual value of the UF (an index that adjusts on a daily basis), converted to CLP using the CLP/UF exchange rate at the time of payment (see the Bloomberg ticker CLF). Example: On 9 February 2011, the 9 August 11 UF forward is trading at 22,000. An investor buys the contract for CLP1m. Assume that on 9 August 2011, the UF index is at 24,000, which means the investor would stand to receive CLP2m.
Cross-currency swaps
CLP/Libor swaps provide the ability to receive or pay a fixed rate in CLP versus floating-rate in six-month Libor (denominated in USD). Payments occur semiannually, on an actual/360 basis.
Table 14. Chile: Interest-rate swap (IRS) and cross-currency swap (CCS) markets Onshore IRS Nonresident access Tenors Liquid tenors Average trade size Bid/offer spreads under normal conditions (bp) Fixing rate Day count Effective date Fixing time (local time) Fixing page Local market hours Main participants
Source: HSBC
Offshore IRS Yes 1-20Y 1-5Y CLP5bn or UF300k 5bp Abif Act/360 T+2 Abif www.abif.cl 9.00-13.00 Local banks and offshore banks, offshore hedge funds
Onshore CCS Yes 1-20Y 1-5Y CLP5bn or UF300k 5 bp Abif Act/360 T+2 Abif www.abif.cl 9.00-13.00 Local banks and offshore banks, insurance companies
Yes 1-20Y 1-5Y CLP5bn or UF300k 5bp ICP: Published by Abif, www.abif.cl Act/360 T+2 ICP: Published by Abif www.abif.cl 9.00-13.00 Local banks
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Foreign exchange
Source: HSBC

Regulation
Access to Chiles domestic bond market has been simplified but is still relatively more cumbersome than in comparable countries. Foreign investors need to obtain a tax identification number and typically sign a custodial agreement with a bank or broker. At the time of this writing, the authorities are in the middle of implementing a new regulation to make it easier for foreign investors to buy local sovereign debt and simplify taxation for foreigners. Please seek legal or tax advice before making an investment decision.
USD4.0bn spot USD2.5bn 50pips USD1.5bn 30pips USD1.0bn 50pips 6-months 0.7 vol (USD30m)
Useful links
Table 16. Information sources Banco Central de Chile (BCCh) Ministry of Finance National Statistics Institute (INE) Electronic securities exchange Securities commission Pension fund regulator HSBC Chile page
Source: HSBC
Settlement
Settlement for domestic bonds is conducted through a central depository (DCV) and settled on T+1, swaps settle on T+2.
Taxation
Foreign investors are subject to capital gains tax of 35%, which applies to nonresidents but not to institutional investors. In addition, there is a 4% income tax, which may be waived if a double taxation agreement is in place.
http://www.bcentral.cl http://www.minhda.cl http://www.ine.cl http://www.bolchile.cl http://www.svs.cl http://www.safp.cl HSCH <GO>
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Table 17. Chile: Bonds BCU Issuer Chilean central bank Currency UF, settles in CLP Form Scripless Minimum denomination UF500 Tenors 5, 10, and 20 years Coupon/discount 3% fixed currently Coupon frequency Semiannual Amortizing schedule Bullet Day count Actual/360 Amount outstanding CLP4trn Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Exchange or OTC 9.30-13.30 Yield semi act/365 3 bp BCU 5y -10y, 5bp for others UF100.000 (about USD4m) Daily UF4m (USD160m) T+0, T+1, T+2 Local custodian DCV (Deposito Central de Valores) Pension funds, banks, mutual funds, insurance companies, stockbrokers Exchange or OTC 9.30-13.30 Yield semi act/365 3 bp BTU 5y -10y, 5bp for others UF 100.000 Daily UF4m T+0, T+1, T+2 Local custodian DCV (Deposito Central de Valores) Pension funds, banks, mutual funds, insurance companies, stockbrokers Need to open local custody with tax ID Capital gains (CG) and withholding tax (WHT) For offshore investors: CG 35%, bonds issued from 2010 CG 0%, subject to certain requirements 4% of the interest received Exchange or OTC 9.30-13.30 Yield semi act/365 5bp CLP1bn CLP20bn T+0, T+1, T+2 Local custodian DCV (Deposito Central de Valores) Pension funds, banks, mutual funds, insurance companies, stockbrokers Need to open local custody with tax ID Capital gains (CG) and withholding tax (WHT) For offshore investors: CG 35%, bonds issued from 2010 CG 0%, subject to certain requirements 4% of the interest received Exchange or OTC 9.30-13.30 Yield semi act/365 5bp CLP1bn CLP 20bn T+0, T+1, T+2 Local custodian DCV (Deposito Central de Valores) Pension funds, banks, mutual funds, insurance companies, stockbrokers Need to open local custody with tax ID Capital gains (CG) and withholding tax (WHT) For offshore investors: CG 35%, bonds issued from 2010 CG 0%, subject to certain requirements 4% of the interest received Exchange or OTC 9.30-13.30 Yield act/30 2bp CLP 1bn CLP40bn T+0, T+1 Local custodian DCV (Deposito Central de Valores) Pension funds, banks Dutch UF3,000,000 Monthly Banks, pension funds, insurance companies, and mutual funds BTU National treasury UF, settles in CLP Scripless UF500 5- to 30-year 3% fixed currently Semiannual Bullet Actual/360 CLP6.3trn Dutch UF3,000,000 Monthly Banks, pension funds, insurance companies, and mutual funds BCP Chilean central bank Chilean peso (CLP) Scripless CLP5.0m 2, 5, and 10 years 3%, 6%, and 8% fixed Semiannual Bullet Actual/360 CLP2.3trn Dutch CLP20.0m Monthly Banks, pension funds, insurance companies, and mutual funds BTP National treasury Chilean peso (CLP) Scripless CLP5.0m 5- to 10-year 6% Semiannual Bullet Actual/360 CLP1.1trn Dutch CLP20.0m Monthly Banks, pension funds, insurance companies, and mutual funds PDBC Chilean central bank Chilean peso (CLP) Scripless CLP5.0m Zero Zero Bullet Actual/360 CLP2.9trn Interactive CLP20.0bn Weekly Banks, pension funds, insurance companies, and mutual funds
Regulations for foreign investors Restriction on foreign Need to open local custody investment with tax ID Custodian Interest income tax Capital gains (CG) and withholding tax (WHT) Capital gains tax For offshore investors: CG 35%, bonds issued from 2010 CG 0%, subject to certain requirements Entry/exit 4% of the interest received
Source: HSBC
Need to open local custody with tax ID Capital gains (CG) and withholding tax (WHT) For offshore investors: CG 35%, bonds issued from 2010 CG 0%, subject to certain requirements 4% of the interest received
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Emerging Markets Colombia March 2011
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Colombia
Fixed-rate TES is the most important local instrument, though foreign
investors are active in Global TES, as well

UVR TES (inflation-linked) face increasing demand due to rising inflation Foreign participation in the local market is materially lower than in regional
peers
Market structure
Local debt has become increasingly relevant in Colombia over the past 10 years. The proportion of locally issued paper with respect to total government debt reached 75% at the end of 2010 from only 25% in 2001. Within local debt, fixed-rate TES is the largest paper outstanding, also carrying the highest liquidity. Inflation-linked UVRs trail by far in size and liquidity, and the IPC-linked has lost its appeal since the government discontinued its auctions. The main market participants in the local market are pension funds, local Banks, and brokerage houses. Colombia arguably has the regions lowest proportion of foreign investors in its local market, accounting for only c2% of the total.
Recent developments
Effective this year, foreign investors are allowed to participate in several local market instruments, including fixed-income paper, with much looser requirements. Instead of having to set up a foreign capital investment fund (FCIF), foreign investors need only to appoint a local administrator to access the local market. This regulatory change was made possible by the issuance of Decree 4800. Even though this reform represents a step to increase foreign participation in the local market, the current 33% income tax should continue to discourage any large flow of foreign investment into the country.
Chart 18. Colombian local government debt by currency composition
Chart 19. Local debt composition by rate structure (%)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
6%
USD COP UVR
22%
COP
4% 69%
Jun-01 Dec-02 Jun-04 Dec-05 Jun-07 Dec-08 Jun-10

Source: Ministry of Finance and Public Credit
COP Fixed
TES IPC
TES UVR
Others
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Table 18. Colombia: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank COP2.2trn Onshore interbank COP200bn Offshore investors with onshore N/A Onshore nonbank investor (eg custodian) with onshore N/A Eligible collateral for repos For CB repos TES, Bonos para la seguridad, TRDs, TDAs, Ttulos de Deuda Externa, TCO, FOGAFIN For interbank repos TES, TCO, corporates, FOGAFIN Mark-to-market requirements Bank Yes Insurance companies Yes Pension funds Yes Mutual funds Yes Taxation: Government bonds Onshore investors Withholding tax over interest: 7% less than 5Y and 4% more than 5Y Offshore investors Income tax 33% Offshore investors access Foreign ownership of government bonds As % of outstanding 1.527% Direct purchase No Subject to cap Yes Registration requirement Yes Access to inshore funding No Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps, repo, futures) Yes Market liquidity statistics Daily turnover COP6.0trn Buying volume in a single day with minimal COP200bn market impact Bid/offer spreads under normal conditions (bp) 2.5
Source: HSBC
Monetary policy
The Banco de la Repblica de Colombia (BanRep) follows an inflation-targeting rule that aims to keep the consumer price index between 2% and 4%. The central bank implements monetary policy by changing the overnight lending interest rate, which either provides liquidity to the economy or withdraws liquidity from it. Through these changes in the overnight lending rate, BanRep affects the market interest-rate curve. BanReps board of directors consists of seven members with one vote each: the finance minister, five full-time members, and the banks general manager, who is appointed by the other members. Full-time members and the general manager are appointed to terms of four years, twice renewable, which means they may remain on the board as long as 12 years. The Colombian president replaces two of the full-time members every four years, halfway through the presidential term. Under the constitution, BanRep is independent from the other branches of government and is subject to its own legal regulation.
Key policy rates

The benchmark monetary policy rate used by the central bank) is the BanRep overnight lending rate; see the Bloomberg ticker CORRRMIN.
Colombias debt profile looks heavily front-loaded, compared to long-term debt obligations. Local debt accounts for most of short-term debt payments (see Chart 20).
Chart 20. Total debt amortization profile (USDbn)
16 14 12 10 8 6 4 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Local External

The Colombian local debt market is composed mainly of fixed-rate TES bonds (see Chart 19). Foreign participation in the local fixed income market is still significantly lower than that in other markets in the region. The Colombian government in 2010 showed a preference to issue COP-denominated paper over external debt, which should result in growing foreign participation in domestic securities. Yet regulation continues to stand in the way of a more heterogeneous market. The benchmark of the local TES curve is the Coltes 2020, where most of the liquidity is concentrated.
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Derivatives
Cross-currency swaps exist for both COP/USD Libor and UVR/USD Libor. COP/USD Libor curves extend from one to 15 years with liquidity concentrated in two- to 10-year tenors. The average trade size is USD10m, with bid-offer spreads of 15-20bp. UVR/USD Libor curves extend from one to 10 years, with poor liquidity across the curve. Bid-offer spreads could be as high as 100bp. Nonresidents may access the FX forward market to hedge currency risk on underlying investments.
Bonds
The Ministry of Finance and Public Credit is responsible for all government debt issuance. Yet BanRep announces the conditions of each auction one day before the scheduled date. Fixed-rate TES and inflation-linked UVR TES are the only two instruments with scheduled auctions, the former issued biweekly in sizes of about COP500bn and the latter auctioned monthly in amounts close to COP400bn.
COP fixed-rate debt securities
Local TES B are government bonds with maturities from one to 14 years. These instruments carry a fixed coupon and amortize their capital at maturity. The local TES curve is the most actively traded in Colombia. Auctions for this paper take place twice a month.
COP inflation-linked debt securities

Regulation
Foreign investors may access Colombian local fixedincome instruments directly through an appointed local administrator. The administrator can be a local broker dealer or a fiduciary. Since the issuance of Decree 4800 in December 2010, investors are is no longer required to have a foreign capital investment fund (FCIF).
TES UVR (unidades de valor real) are inflation-linked instruments with maturities ranging from one to 13 years. UVR paper carries an annual fixed coupon and amortizes capital at maturity. The face value of these bonds is expressed in UVR units and is adjusted by the UVR index, which follows the consumer price index with a one-month lag. On the 15th of every month, the central bank resets the UVR index for the following 30 days based on the previous months CPI reading. The UVR index is published daily by the central bank. TES IPC is an inflation-linked instrument with maturities ranging from one month to three years. Unlike the TES UVR, the TES IPC has a floating annual coupon that reflects the 12-month trailing CPI rate plus a premium in basis points. The nominal amount is measured in COP.
Global TES bonds
Settlement
Government bonds are settled electronically through Sebra/Deceval administered by BanRep. Foreign investors must appoint a local custodian. The standard settlement period for fixed income instruments is T+0 on a delivery versus payment (DVP) basis.
Taxation
Foreign investors are subject to a withholding tax of 7% for short-tenor bonds of less than five-year maturities and 4% for long-tenor bonds of more than five-year maturities. Withholding tax is deductible from the income tax of 33%. Regarding gains from currency appreciation, a 16% value-added tax is applicable to them if and when funds are repatriated.
Global TES are COP-denominated bonds with USD settlement and issued under foreign law. Clearing for these instruments is available through Euroclear, allowing foreign investors exposure to local currency bonds without the need to comply with local regulations. The USD/COP exchange rate that is used to calculate coupon and principal payments is a 20-day average of the average market rate on the third business day before the payment.
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Foreign exchange
Source: HSBC
USD1.0bn USD10.0m COP2 USD10.0m COP3 USD500m COP3 6-month 1 vol
Useful links
Table 20. Information sources Banco de la Republica (BanRep) Ministry of Finance and Public Credit National Statistics (DANE) Stock exchange Securities commission
Source: HSBC
www.banrep.gov.co www.minhacienda.gov.co www.dane.gov.co www.bvc.gov.co www.superfinanciera.gov.co
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Table 21. Colombia: Bonds TES Tasa Fija Issuer Currency Form Minimum denomination Tenors Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Finance ministry Colombian peso (COP) Scripless COP500,000 From 6 months to 14 years Fixed Annual Bullet NL/365 COP98.2trn Dutch COP500bn Biweekly Local banks and brokerage houses (market makers program) T+0 SEN/MEC/OTC 8am-4pm Yield up to 2 decimal places 2bp COP5.0bn COP5.0trn T+0 Sebra/Deceval Pension funds, local banks, brokerage houses, and foreign investors TES UVR Finance ministry Colombian peso (COP) Scripless UVR10,000 From 6 months to 13 years Inflation-linked Annual Bullet NL/365 COP30.3trn Dutch COP400bn Monthly Local banks and brokerage houses (market makers program) T+0 SEN/MEC/OTC 8am-4pm Yield up to 2 decimal places 4bp UVR20.0m COP5.0bn T+0 Sebra/Deceval Pension funds, local banks, brokerage houses, and foreign investors Need to open a trading account with an appointed administrator Local custodian required Yes Yes No Global TES Finance ministry Colombian peso (COP) Scripless 5-10-17 years Fixed Annual Bullet NL/365 COP5.6trn Dutch N/A No schedule Foreign banks T+3 OTC Yield up to 2 decimal places 15-25bp COP5.0bn COP10bn T+0 Sebra/Deceval Offshore banks, Pension funds, local banks, brokerage houses, and foreign investors No No Yes Yes No TES IPC Finance ministry Colombian peso (COP) Scripless COP500,000 10-15 years Inflation-linked Annual Bullet NL/365 COP5.3trn N/A N/A No schedule N/A T+0 SEN/MEC/OTC 8am-4pm Yield up to 2 decimal places N/A N/A N/A T+0 Sebra/Deceval Pension funds, local banks, brokerage houses, and foreign investors Need to open a trading account with an appointed administrator Local custodian required Yes Yes No
Regulations for foreign investors Restriction on foreign investment Need to open a trading account with an appointed administrator Custodian Local custodian required Interest income tax Yes Capital gains tax Yes Entry/exit No
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Emerging Markets Mexico March 2011
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Mexico
Domestic debt represents 80% of central government debt Government will continue to extend the duration of its total debt portfolio Foreign investors are exempt from withholding tax on government bonds
Market structure
Over the past 10 years, the Mexican government has reduced the vulnerability of public debt to FX swings by increasing the weight of fixed-rate debt in its debt stock. During that time, the strategy has focused on increasing the relative importance of domestic debt in the central governments debt portfolio. To reach this objective, price stability and pension system reform have played important roles to generate confidence among domestic and foreign investors. Other factors also have contributed to development of the local rates market, such as credibility of monetary policy, prudent management of fiscal accounts, and transparency of FX policy.
Nowadays, domestic debt represents about 80% of the central governments debt, up from 55% in 2000. In terms of breakdown, nominal fixed-rate debt increased from 15% in 2000 to 58% at the end of 2010. Since 1999, the government has extended the yield curve from a maximum maturity of one year to the current 30 years. The weighted average maturity now stands at almost seven years. The Mexican debt market is one of the most liquid in EM and has strong participation by foreign investors and local pension funds. Foreign investors hold 22% of the central governments total domestic debt. Local pension funds, Afores, hold 20% and local mutual funds 15%. The rest is distributed among local banks, insurance companies, and other local investors.
Chart 21. Central government debt distribution

100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Domestic
Source: Ministry of Finance
Chart 22. Domestic debt distribution by rate type

100% Inflation-linked 80% 60% 40% 20% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Floating-rate
Fixed-rate
Ex ternal
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Table 22. Mexico: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Yes Onshore interbank Yes Offshore investors with onshore No Onshore nonbank investor (eg custodian) with onshore Yes Eligible collateral for repos For CB repos Federal government bonds For interbank repos Commercial paper, corporate bonds Mark-to-market requirements Banks Yes Insurance companies Yes Pension funds Yes Mutual funds Yes Taxation: Government bonds Onshore investors Withholding tax of 0.5% Offshore investors Exempted when there is tax treaty Offshore investors access Foreign ownership of government bonds MXN696bn (of which MXN492bn is MBonos, MXN170bn Cetes) As % of outstanding 23% Direct purchase Yes Subject to cap No Registration requirement Yes Access to inshore funding No Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps or IRS, repo, futures) Yes (IRS) Market liquidity statistics MBonos Daily turnover MXN15bn Buying volume in a single day with minimal MXN50m market impact Bid/offer spreads under normal conditions 3bp Udibonos Daily turnover MXN5bn Buying volume in a single day with minimal MXN30m market impact Bid/offer spreads under normal conditions 3bp to 5bp Cetes Daily turnover Buying volume in a single day with minimal market impact Bid/offer spreads under normal conditions
Source: HSBC
Recent developments
Throughout 2010, public debt policy facilitated the recovery of the local financial markets and kept a high degree of flexibility to adapt to financial markets changes. This contributed to the recovery of domestic markets following the financial disruption of 2008 and 2009. Risk indicators of the debt portfolio have started to improve, following deterioration during the global financial crisis. In particular, the government has returned gradually to the structure of securities issuance that prevailed before the crisis. An important factor that contributed to the recovery of the local debt market was the inclusion of local fixed-rate bonds, MBonos, in Citis World Global Bond Index (WGBI) on 1 October 2010. Nineteen MBonos were eligible to be included in the index with a total market value of MXN116bn, which represents a market weight of 0.65% of the WGBI. The inclusion of MBonos in the WGBI fostered several changes in the issuance policy. As the minimum size for individual MBonos was established at MXN10bn, the government started to sell bonds through debt syndication. This ensures that new issuances have larger initial amounts outstanding, leading to better liquidity in the secondary market and a wide allocation among local and foreign investors. This program is only complementary; it has not replaced the issuance policy of weekly auctions. In addition, foreign investors holdings in nominalfixed rate bonds increased sharply in 2010. Total inflows to the MBonos market were MXN165bn (cUSD13.2bn) in 2010. About 99% of these flows were placed among the 19 MBonos eligible for the WGBI, and more than 50% in short-term bonds (one- to five-year bonds). For 2011, the governments strategy will be focused on financing most of the fiscal deficit in the domestic debt market favoring placement of longterm nominal bonds and inflation-linked bonds.
MXN23bn MXN200m 3bp
In the first case, the government will focus on strengthening the liquidity and efficiency of longterm government securities through the bond reopening policy that maintained a reduced number of benchmark bonds with a considerable amount outstanding. The syndication program will be used for 5-, 10-, and 20-year bonds. Regarding inflation-linked bonds, the government aims to foster development of the real interest rate curve due to increasing demand for these securities originated from public sector workers pension reform (ISSSTE). In that sense, the government expects to increase gradually the share of inflationlinked bonds in the total domestic debt portfolio in the next few years.
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certificates of deposit, bank notes, and bankers acceptances traded by banks and stock brokerage firms in the wholesale market. The Bloomberg ticker is MXONBR.
Segregation and reconstitution of fixed-rate bonds and inflation-linked bonds (STRIPS) has been possible since 2005. In 2011, it appears likely that the government will implement measures to continue development of this market, given the potential growth of the life annuities market.
Key market rates

28-day TIIE rate: The interbank equilibrium interest rate is the benchmark rate that applies to commercial bank loans and is published by Banxico at 12.30 pm local time on a daily basis. To calculate it, every day Banxico surveys seven banks between 11:45 am and 12:00 pm local time to quote MXN350m. See Bloomberg ticker MXIBTIIE.
Monetary policy
The Banco de Mxico (Banxico) is an autonomous entity that conducts monetary policy. Its main mandate is to preserve the currencys purchasing power. Back in 2001, Banxico established an inflation-targeting regime with an objective of 3% and a variability band of +/-1%. The operational tool to conduct monetary policy since January 2008 has been the policy rate called the Fondeo rate (overnight rate or tasa de fondeo). Previously, Banxico used el corto, a money market liquidity measure, as a monetary policy instrument based on a target level for banks current account balances at the central bank. Banxico has a collegiate body consisting of a governor and four deputy governors who are appointed by the Mexican president and ratified by the senate. The president may not remove any governing board members from their posts. The governor and the deputy governors serve alternately. The governor serves for six years, starting in the middle of a six-year presidential term and ending after the first three years of the following presidential term. Deputy governors serve for eight years and are replaced alternately every two years. The Banxico board meets eight times per year. The calendar of meetings is released on the central banks Web site. Banxico releases on its Web site the minutes of the monetary policy meetings two weeks following each session. In addition, it releases quarterly inflation reports about five weeks after the end of every quarter. Banxico uses open market operations such as repos and deposit/lending facilities. The instruments used for open market operations are government securities: Bondes D (floaters) and/or Cetes (bills).

The size of the Mexican domestic bond market as of November 2010 was about USD343bn, or c35% of GDP. This amount included central government debt, IPAB (explained below), corporate sector, public enterprises, and agencies. Approximately 63% of the bond market is composed of central government bonds. The rest is explained by corporate and agency bonds. There are eight market makers, which have the right to participate in the green shoe one working day following the weekly auction day. Market makers may buy the smallest amount between the 20% of the total amount placed in the primary auction for each bond, and the total amount of eligible bids sent by the market maker, for each bond. Eligible bids are those for which the yield is equal to or lower than the highest yield allocated in the primary auction, multiplied by some factor. Also, market makers have access to the securities lending program with Banxico for as much as 2% of the total amount outstanding for each bond. Foreign participation in the Mexican government bond market jumped to 21% of the total amount outstanding at the end of 2010, from 12% a year earlier. This was a consequence of the inclusion of the nominal fixed-rate bonds to the Citis World Government Bond Index (WGBI), as two-thirds of the increase was concentrated in the bonds that were eligible to the WGBI (USD13bn) and the remainder was increased mainly in government bills (Cetes). HSBC provides indicative prices for Mexican domestic government debt securities via Bloomberg page HSMX.
Key policy rates

Fondeo rate: This is the overnight rate charged in the interbank market. It is a representative interest rate on one-day repo and one-day outright operations with
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on the corresponding settlement date. Udibonos were developed in 1996 to protect holders from unexpected changes in the inflation rate. The government issues 3-, 10-, and 30-year Udibonos every four weeks. In 1995, Mexico introduced a price level-adjusting unit of account called Unidad de Inversin (UDI). An UDI is a unit of account of real constant value. The value of the UDI changes every day and is calculated based on information from the previous two weeks, which is calculated and published by Banxico in the Official Gazette. UDI values can be found on Banxicos Web site. Savings protection bonds (BPAs): Floating-rate bonds issued by the Institute for the Protection of Bank Savings (IPAB), these also are called IPABONOS. These are not government bonds, but agency bonds. They refinance the institutes financial needs and improve the terms and conditions of its financial obligations. These bonds were issued for the first time in 2003. They are issued at a three-year tenor; previously, they were also issued at a one-year tenor. BPAs pay interest on a 28-day basis. The reference rate is one-month Cetes. The interest rate period starts on the BPAs issuing date. These periods are the same as those of one-month Cetes issued at primary auction at the beginning of each period. BPAs are auctioned on a weekly basis. Savings protection bonds with quarterly interest payment (BPATs): These five-year floating-rate bonds are issued by the Institute for the Protection of Bank Savings (IPAB). BPATs pay interest on a quarterly basis. The reference rate is the three-month Cetes, and the interest rate period must be the same as for those Cetes issued at primary auction at the beginning of each period. BPTs are auctioned on a weekly basis. Savings protection bonds with a biannual interest payment and protection against inflation (BPA182): These seven-year, floating-rate bonds are issued by the Institute for the Protection of Bank Savings (IPAB). BPA182 pay interest on a semiannual basis. The BPA 182 interest rate has two components: a market rate (six-month Cetes), and an option that protects the holder against inflation. That is, this eliminates any possibility of a negative real interest rate.
Chart 23. MBonos holdings by foreign residents

MXNm 500,000 450,000 400,000 350,000 300,000 250,000 200,000 Jan-08 May -08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov -10
Source: Banxico
Foreign residents
Bonds
Federal treasury certificates (Cetes): These are zerocoupon bonds issued by the federal government. Cetes were issued for the first time in 1978 and constitute the oldest instrument in the local debt market. These bonds have been the base for development of the local market and enlargement of the yield curve. Cetes are issued in auctions on a weekly basis. Maturities range between one month and one year. Federal government development bonds (Bondes D): These floating-rate bonds were issued by the federal government for the first time in 2006. Bondes D pay coupon every 28 days at the overnight effective rate, compounded daily during the interest rate period. Bondes D are issued in auctions every two weeks in three- and five-year tenors. Federal government development bonds with fixed interest rate (MBonos): These nominal fixed-rate bonds are issued by the federal government. The first issuance came in 2000. MBonos pay a semiannual coupon, which is calculated on an actual/360-day basis. Currently, the government issues 3-, 5-, 10-, 20-, and 30-year bonds. Previously, a 7-year bond was issued, but it was discontinued in 2007. The 3- and 5-year MBonos are auctioned every four weeks and the 10-, 20-, and 30-year bonds every six weeks. Federal government development bonds denominated in inflation-indexed investment units (Udibonos): These inflation-linked bonds issued by the federal government are denominated in indexed investment units (UDIs). For the purpose of placement, interest payments, and amortization, Udibonos are converted to domestic currency at the value of the UDI
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corresponding UDI fixing as of the payment date. At the end of the contract, principal amounts are exchanged. The UDI notional is converted to MXN at the corresponding UDI fixing. Tenors go from six months to 30 years. Another variant, which is more liquid, is the UDI-USD LIBOR swap. This is an offshore swap that consists of a fixed coupon denominated in UDI that is exchanged against a floating coupon denominated in six-month USD Libor. Coupons are paid every six months. Similar to the TIIE-LIBOR swap, the notional is fixed at the spot FX rate and is exchanged twice: at the beginning and at the maturity of the swap. Tenors go from one year to 30 years. Cross-currency basis swap (TIIE-USD Libor swap): This a floating versus floating swap (basis swap) denominated in two different currencies (MXN and USD). One leg is MXN-denominated and pays 28-day TIIE, and the other leg is denominated in USD and pays one-month Libor rate plus a basis swap spread. Payments are exchanged every 28 days. Notionals are fixed at the spot FX rate and are exchanged twice during the contract, at the beginning and at the maturity of the swap. Tenors go from three months up to 30 years.
The reference rate is the rate of return on Cetes issued in a primary auction for terms of six months. Coupon payments are determined at the maximum between the percentage increase in the value of the UDI over the interest period and the reference rate and a spread over six-month Cetes.
Derivatives
Fixed income derivatives consist of onshore and offshore interest rate swaps and cross-currency swaps. Interest rate swaps (TIIE swaps): This is an over-thecounter, fixed-for-floating interest rate swap. The floating leg is indexed to the 28-day TIIE rate. Swaps are effective T+1. The first TIIE rate used is the T+0 rate. On the floating leg, the 28-day TIIE rate paid on each coupon date is fixed on the previous coupon date. The floating leg fixes every 28 days. This is the most liquid fixed-income derivative traded in the local market. The TIIE curve extends from three months to 20 years, but 3-, 6-, and 9-months, alongside 1-, 2-, 3-, 4-, 5-, 7-, 10-, 15-, and 20-years are listed, but decent liquidity is found up to the 10-year tenor. The common trade size is between MXN100-200m 10-year equivalent with bid-offer spreads around 3bp. Swaptions (TIIE swaptions): These are European options on TIIE swaps. The notional and maturity are agreed between parties, and for an upfront premium, the buyer of the swaption can choose the tenor, strike rate, and length of the option period. The option length extends from one month to five years, but liquidity can be found up to two years. Tenors go from one month to 20 years, with the best liquidity in the 1-, 2-, 5-, and 10year TIIE. Inflation linked-interest rate swaps (UDI-TIIE swaps): This is an interest rate swap traded OTC, where the fixed-rate leg of the coupon is based on the UDI and the floating leg is based on the 28-day TIIE. Coupon payments dates are on an actual/360 day-count basis. The UDI fixed coupon leg is payable every 182 days based on an UDI notional amount, but payments on the floating TIIE leg are every 28 days based on an MXN notional amount. All payments are made in MXN, and the UDI fixed-coupon leg is converted to MXN at the

Regulation
Mexico allows for the free flow of capital across its borders. Thus, there are no barriers to entry or exit. Foreign investors do not face restrictions to trade government bonds. Regarding custody, offshore investors can decide for local custody, through Indeval, which is recognized by the US Securities and Exchange Commission (SEC), or Euroclear or Clearstream abroad. Derivatives trading is regulated by the International Swaps and Derivatives Association (ISDA). Foreign investors are required to sign a general contract in accordance with ISDA regulation when transacting derivatives. Moreover, depending on the type of derivative (forward, swaps, or options), a specific contract may need to be closed in addition to the general one.
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Foreign exchange
Source: HSBC
Settlement
Mexican government bonds trade both OTC and thought the Mexican Stock Exchange. Settlement is usually T+2; however, only for MBonos, the settlement is allowed for up to T+8. Settlement through local custody, Indeval, is provided by delivery vis--vis payment. TIIE swaps settlement is T+1, but UDI-TIIE, UDI-Libor or TIIE-Libor swaps are settled at T+2.
Taxation
There are no entry or exit taxes. Interest payments are subject to withholding tax, but only in the case of federal government bonds, foreign residents can be exempt if there is an agreement to avoid double taxation between both countries. Local residents are subject to withholding tax of 0.5%. Derivatives and corporate debt are subject to withholding tax. Interest payments to foreign residents in tax treaty countries registered with the finance ministry are subject to a 4.9% withholding tax. For those in the absence of a tax treaty, the rate is 10%.
USD5bn spot USD5m 100-130pips 1-month USD1m 1-month 30pips 12-month 100 pips USD13bn spot 50pips 6-month 0.4 vol (USD50m)
Useful links
Table 25. Information sources Banco de Mexico Ministry of Finance National Statistics, Geography and Informatics Institute Mexican Stock Exchange Banking and Securities Commission Savings for Retirement Commission Reuters Fixing page Bloomberg Fixing page HSBC Mexico Web page
Source: HSBC
www.banxico.org.mx www.hacienda.gob.mx www.inegi.gob.mx www.bmv.com.mx www.cnbv.gob.mx www.consar.gob.mx HSMX01, HSMX02 HSMX1, HSMX2 HSMX <GO>
Table 23. Mexico: Interest-rate swap (IRS) and cross-currency swap (CCS) markets Onshore IRS Non-resident access Tenors Liquid tenors Average trade size Bid/offer spreads under normal conditions (bp) Fixing rate Day count Effective date Fixing time (local time) Fixing page Local market hours Main participants
Source: HSBC
Offshore IRS Yes 1-20 years 2, 5, and 10 years USD15,000 DV01 3-5bp 28-day TIIE Act/360-day T+1 1:00pm www.banxico.org.mx, www.bba.org.uk/ 7am-2pm Foreign investors
Onshore CCS Yes From 3 months to 30 years 3m, 6m, 9m, 1y to 5y USD30m 10bp 28-day TIIE and 1-month Libor Act/360-day T+2 1:00pm www.banxico.org.mx 7am-2pm Foreign investors, Interbank
Yes 1-20 years 2, 5, and 10 years USD15,000 DV01 3-5bp 28-day TIIE Act/360-day T+1 1:00pm www.banxico.org.mx 7am-2pm Interbank
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Table 26. Mexico: Bonds Cetes Issuer United Mexican States (UMS) Mexican pesos (MXN) Bondes D United Mexican States (UMS) Mexican pesos (MXN) MXN100 Bonos United Mexican States (UMS) Mexican pesos (MXN) MXN100 UdiBonos United Mexican States (UMS) UDIS MXN100 TIIE swaps Interbank agreements MXN 3x1 - 13x1: MXN100, 26x1: MXN50, 39x1 - 91x1: MXN30, 130x1 - further: MXN20 3m, 6m, 9m, 1y, 2y, 3y, 4y, 5y, 7y, 10y, 12y, 15y, 20y (1y = 13 payments every 28 days) Fixed coupon vs. floating 28d TIIE 28 days Bullet Actual/360 N/A N/A N/A N/A N/A N/A
Currency Form Minimum denomination MXN10
Tenors
1m, 3m, 6m, and 1 years
3 and 5 years
3, 5, 10, 20, and 30 years
3, 10, and 30 years
Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants
Zero coupon Zero Bullet Actual/360 MXN552bn Multiple rate allocation MXN16bn weekly Weekly (1year tenor every 4 weeks) Banks, local funds, individuals. foreign accounts through local banks T+2 OTC 7am to 2pm Yield up to 2 decimal places 2-4bp MXN100m MXN7-11bn Usually T+2 Local/Euroclear Local banks and funds, foreign real money funds and hedge funds.
Fondeo rate compounded daily 28-day coupon Bullet Actual/360 MXN425bn Multiple rate allocation MXN2.0bn weekly Weekly (different tenors each week) Banks, local funds, individuals. foreign accounts through local banks T+2 OTC 7am to 2pm Spread over reference 2-4bp MXN100m
Fixed rate Semiannual Bullet Actual/360 MXN1552bn Single rate MXN4.5bn weekly Weekly (different tenors each week) Banks, local funds, individuals, foreign accounts through local banks T+2 OTC 7am to 2pm Yield up to 2 decimal places 2-4bp
Inflation-linked UDI Semiannual Bullet Actual/360 MXN525bn Single rate UDI 500m weekly Weekly (different tenors each week) Banks, local funds, individuals. foreign accounts through local banks T+2
OTC OTC 7am to 2pm 7am to 2pm Yield up to 2 decimal places 2-4bp 2-4 up to 50k 4-6 for larger MXN50m MXN2-4bn Usually T+2 Local/Euroclear Local banks and funds, foreign real money funds and hedge funds Not restricted Local or Euroclear Withholding tax 0.5%, but foreign investors are exempted when there is a tax treaty Exempted when there is a tax treaty No In broker market - 2k dv01 400-600k dv01 T+1 (standard TIIE settle) Local banks and funds, foreign real money funds and hedge funds . No No 4.9% if there is a tax treaty, 10% if not Exempted when there is a tax treaty No
MXN50m MXN7-11bn Usually T+2 Usually T+2 Local Local/Euroclear Local banks and funds, Local banks and funds, foreign real money funds and foreign real money funds and hedge funds hedge funds Not restricted Local or Euroclear Withholding tax 0.5%, but foreign investors are exempted when there is a tax treaty Exempted when there is a tax treaty No Not restricted Local or Euroclear Withholding tax 0.5%, but foreign investors are exempted when there is a tax treaty Exempted when there is a tax treaty No
Regulations for foreign investors Restriction on foreign Not restricted investment Custodian Local or Euroclear Interest income tax Withholding tax 0.5%, but foreign investors are exempted when there is a tax treaty Capital gains tax Exempted when there is a tax treaty Entry/exit No
Source: HSBC
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Emerging Markets Peru March 2011
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Peru
Government will continue to focus on domestic debt issuance Local currency bonds, Soberanos, are the main instruments in the
domestic market Foreign participation has increased sharply in the past decade
Market structure
Perus economic growth has averaged 6.7% in the past seven years. This performance includes 2009, when the economy only grew 0.9% due to the global financial crisis. Debt-to-GDP ratios fell from 45% in 2004 to less than 25% at the end of 2010. Back in 2002, domestic debt accounted for only 8% of total debt, but today this is at 45%. In addition, fixedrate government debt has increased to 75.8% of total debt from 40% in 2004. The duration of domestic market debt is 9.4 years, one of the highest levels in the region. The government extended the local yield curve from five years in 2004 to more than 30 years in 2009.
The government has three goals in its debt management policy: To increase the share of local-currency, fixed-rate bonds, Soberanos, in the debt portfolio to contribute to the de-dollarization of the economy. To reduce debt amortization payments, particularly in the next three years. To deepen local markets by consolidating domestic debt. Domestic debt totals about PEN28bn, and more than 85% of it corresponds to nominal fixed-rate bonds, Soberanos. Participation by foreign investors is high, and in relative terms, the highest in Latin America. Foreign investors hold 43% of Soberanos outstanding, and local pension funds (AFPs) have 38%. The rest is distributed among local banks, insurance companies, and local mutual funds.
Chart 25. Distribution of central government debt
100%
Chart 24. Primary fiscal balance

6 5 4 3 2 1 0 -1 -2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: BCRP
% GDP Primary Fiscal Balance
80% 60% 40% 20% 0% 2006 Ex ternal

2008 Domestic
2010
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Table 27. Peru: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Yes Onshore interbank Yes Offshore investors with onshore Yes, but with special reserve Onshore nonbank investor (eg custodian) with onshore Eligible collateral for repos For CB repos No For interbank repos No Mark-to-market requirements Banks Internal requirements Insurance companies Internal requirements Pension funds Yes Mutual funds Yes Taxation: Government bonds Onshore investors Financial transactions tax Offshore investors Exempted from withholding tax and capital gains tax. Financial transactions tax (0.05%) may apply Offshore investors access Foreign ownership of government bonds PEN12.3bn As % of outstanding 42.88% Direct purchase Yes, with a local custodian and central banks account Subject to cap No Registration requirement Yes Access to inshore funding No Access to onshore FX hedging Yes Access to rates hedging (interest rate swaps, repo, futures) Yes Market liquidity statistics Soberanos (LCbn) PEN140m Buying volume in a single day (USDm) with USD50.5m minimal market impact Bid/offer spreads under normal conditions (bp) 8bp VAC (LCbn) PEN2.5m Buying volume in a single day (USDm) with USD0.9m minimal market impact Bid/offer spreads under normal conditions (bp) 20bp
Source: HSBC
Recent developments
In the past seven years, the Peruvian government has focused on reducing vulnerability of public finances through increasing local currency-denominated debt in the debt portfolio, particularly nominal fixed-rate debt. Also, the government has extended the yield curve to more than 30 years. In 2008, Fitch and Standard & Poors upgraded their sovereign ratings on Peru to investment grade, based on the improvements in the debt profile, along with strong macroeconomic fundamentals. In 2009, Moodys highlighted the improvements in the debt profile to upgrade Peru to investment grade, as well. More recently, S&P said that Peru could be upgraded in 2011 due to the resilience of macro fundamentals during the global financial crisis and high economic growth rates with low inflation. Recently, S&P raised its outlook on Perus foreign currency debt to positive from stable. S&P may raise its rating if Perus macroeconomic policies remain in place following the presidential election in April.
Monetary policy
Monetary policy is conducted by the Central Reserve Bank of Peru (BCRP), an independent entity with autonomy in its functions. The banks purpose is to preserve monetary stability. Its functions are to regulate the money supply, administer international reserves, issue notes and coins, and report on the nations finances. The BCRP board of directors is the highest institutional authority. It is composed of seven members. The executive branch appoints four members, among them the BCRP president. Congress ratifies the latter and appoints the other three members. The directors are appointed for terms of five years. They do not represent any particular interest or entity. Congress may remove them from office for serious misconduct.
Since 2002, the BCRP has targeted a range for annual headline inflation of the city of Lima with a target of 2.5% +/-1%. In 2007, it lowered the target to 2% +/-1%. The board meets once per month to decide the reference policy rate. Its decision and a monetary policy statement are released when markets close. The policy tool used by the BCRP is the reference rate. The BCRP intervenes in the FX market to prevent any excess volatility in the PEN FX rate by buying or selling USD, or selling short-term central bank certificates of deposits linked to the FX rate, or both. The main objective of the intervention is to reduce FX volatility. The Peruvian economy is highly dollarized; thus, sharp FX volatility can hurt economic activity through balance sheet effects. The BCRP does not specifically target any particular USD/PEN level.
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HSBC provides indicative prices for Peruvian domestic government debt securities via Bloomberg page HSPE.
Key policy rates

Interbank interest rate: This short-term rate is paid for borrowing, usually overnight, between local banks. The BCRP aims to keep the interbank interest rate close to the policy rate or reference rate through daily openmarket operations
Bonds
Nominal fixed-rate bonds (Soberanos): Issued by the finance ministry, these are the most liquid bonds. The curve extends up to 31 years. Soberanos account for 92% of total local bonds outstanding. Coupons are paid on a semiannual basis and are calculated on a 30/360day basis. Inflation-linked bonds (VAC bonds): These are PENdenominated instruments issued by the finance ministry. The principal and coupons are adjusted by the Valor Adquisitivo Constante (VAC), which is linked to the ndice de Reajuste Diario, or IRD index. VAC is the ratio between the IRD at the payment date and the IRD at the issuance date. The central bank publishes daily figures of the IRD index. The IRD is adjusted by the monthly CPI. Coupons are paid on a semiannual basis and are calculated on a 30/360-day basis.

The Peruvian government, through the finance and economy ministry, issues two types of PENdenominated bonds nominal fixed-rate Soberanos and inflation-linked bonds (VAC). The nominal curve extends from 1-31 years, and the inflation-linked bonds curve goes from 1-35 years. Auctions usually take place once per month in accordance with a schedule provided by the finance ministry two business days before each auction. Liquidity in the local market is still poor and mostly concentrated in Soberanos, such as the 20s, 26s, and 37s. Traded volumes reach about USD1bn per month. The total amount outstanding of local-currency bonds is about PEN28bn, close to USD10bn. Local pension funds (AFPs) are active in the long end of the curve (longer than six years) and local banks in shorter tenors. Foreign investors are more active in the long end of the curve, too. The government has enforced a marketmakers program to improve liquidity in the local market. There are six market makers evaluated by the finance ministry on a monthly basis. As of November of 2010, nonresidents held 42.8% of total Soberanos outstanding, followed by local pension funds with 39.1% and banks with 9.5%.
Chart 26. Distribution of local pension funds portfolio
35 30 25 20 15 10 5 0 Local Gov ernment Bonds
Source: Superintendence of Banks
Derivatives
Cross-currency swap (PEN-LIBOR swap): This is a fixed local rate in exchange for the six-month USD Libor rate on a semiannual basis. Tenors go from 1-10 years, but liquidity is very poor.

Regulation
Trading FX has full convertibility and no restrictions. Offshore investors can hold either PEN- or USDdenominated accounts onshore. There are no capital controls, but the BCRP has introduced measures to contain capital inflows when strong appreciation pressures appear. The primary objective has been volatility management, rather to defend a specific FX rate level. In April 2008, the BCRP increased the marginal reserve requirement on PEN deposits by local and foreign investors to as high as 120% from 40%. At the time of this writing, this measure had already been removed for local investors, but the 120% legal reserve requirement remains in place for foreigners.
% Sep-08 Sep-09 Sep-10
Equity
Foreign assets
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Foreign exchange
Source: HSBC
Settlement
Foreign investors may have a local custodian. Government bonds are settled though the local custodian Caja de Valores (Cavali). There are two ways to trade Soberanos, through a local custody account or through global depository notes (GDNs) of Soberanos. GDNs are Euroclearable. In both cases, there is an FX transaction, but if the client has a local custody account, it is possible to hold PEN; thus, there is no need to do FX transactions each time the client trades Soberanos. To hedge FX risk, there is a fully deliverable market for locals and an NDF market for foreigners. Total traded volume in the NDF market is about USD400m.
US500m USD3m 30pips USD3m 1m 50pips USD100-150m 10pips (0.0010 PEN) 2.5 vols (USD 10m)
Taxation
Government bonds are exempt from withholding taxes or capital income tax. However, bond transactions among domestic investors are subject to the financial transactions tax (ITF), which applies at a rate of 0.05% over the amount of the transaction. This also applies when the foreign client has a local custody account.
Useful links
Table 29. Information sources Banco Central de Reserva del Peru (BCRP) Ministry of Economy and Finance National Statistics (INEI) Stock exchange Superintendencia de Banca y Seguros HSBC Peru page
Source: HSBC
www.bcrp.gob.pe www.mef.gob.pe www.inei.gob.pe www.bvl.com.pe www.sbs.gob.pe HSPE <GO>
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Table 30: Peru: Bonds Soberanos fixed rate Issuer Currency Form Minimum denomination Tenors Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Restriction on foreign investment Custodian Interest income tax Capital gains tax Entry/exit
VAC Finance ministry Peruvian sol (PEN) Scripless PEN 1,000 Up to 40 years Inflation-linked Semiannual Bullet 30/360-day basis PEN2.1bn Dutch PEN100m Monthly Banks, market makers T+1 Datatec 10am to 1pm local time Yield up to 2 decimal places 20bp PEN2m PEN30m T+1 Cavali Banks, AFPs, foreign investors No Local custodian not required No No No
Finance ministry Peruvian sol (PEN) Scripless PEN 1,000 From 1y to 31 years Fixed Semiannual Bullet 30/360-day basis PEN26bn Dutch PEN250-300m Monthly Banks, market makers T+1 Datatec 10am to 1pm local time Yield up to 2 decimal places 10bp PEN15m PEN150m T+1 Cavali Banks, AFPs, foreign investors No Local custodian not required No No No
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Emerging Markets Uruguay March 2011
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Uruguay
Global UI (inflation-linked) securities are the most popular instrument
among foreign investors

The government has been increasing the proportion of local debt to
reduce the FX exposure of its liabilities Recent debt swaps improve the debt profile for the coming years
Market structure
Gross public debt in Uruguay as of 3Q10 totaled USD22.8bn, or 58.6% of GDP, and central government debt excluding central bank and local governments amounted to USD15.7bn, or 40.5% of GDP. Since 2008, the government has been committed to a policy of accumulating liquid assets equivalent to the next 12 months of payments, in an effort to reduce market dependence to service debt. High debt relative to GDP and its dollarized profile stand as the main reasons for Uruguays not achieving investment-grade status yet.
Of central government debt, 58% is US dollardenominated, but this portion has been reduced sharply since 2006, when it reached 75%. The government has committed to continue with debt de-dollarization, with the objective to reach a 45% share of total government debt in UYU by 2014. As a result of several repurchase operations, as well as exchange offerings, the government has improved the debt profile. Now about 20.5% of debt matures in the next five years.
Chart 27. Total public debt by currency
Chart 28. Total public debt by coupon type
4% 14%
39%
20%
55% 2%
2%
2%
80%
UYU
Source: Central Bank of Uruguay
JPY
SDR
EUR
USD
Fixed rate
Libor
Multilaterals
Other
Source: Central Bank of Uruguay
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Table 31. Uruguay: Bond market technicals and liquidity Available repo facilities Onshore banks with central bank Onshore interbank Offshore investors with onshore Onshore nonbank investor (eg custodian) with onshore Eligible collateral for repos For CB repos For interbank repos Mark-to-market requirements Banks Insurance companies Pension funds Mutual funds Taxation: Government bonds Onshore investors Offshore investors Offshore investors access Foreign ownership of government bonds As % of outstanding Direct purchase Subject to cap Registration requirement Access to inshore funding Access to onshore FX hedging Access to rates hedging (interest-rate swaps, repo, futures) Market liquidity statistics Daily turnover (USDm) Buying volume in a single day (USDm) with minimal market impact Bid/offer spreads under normal conditions (bp)
Source: HSBC
Recent developments
In 2010, all main rating agencies upgraded Uruguays sovereign debt rating, leaving it in most cases only one notch away from investment-grade status. In 2010, the government expressed objectives of further reducing the proportion of USDdenominated debt and enhancing liquidity in the domestic market. As part of this strategy, in January 2011, the government issued USD1.2bn in both UYU- and CPI-linked (UI) securities, mainly as part of an exchange for central bank paper. The exchange resulted in the extension of maturities and the issuance of USD136m of fresh financing. Almost all off the new issuance was subscribed by local investors: 42% by local banks and 40% by pension funds. The Budget Law for the next four years indicates that, market conditions allowing, the government seeks to increase the percentage of debt in local currency from 30% at the end of 2009 to 45% at the end of 2014. In addition, to reduce foreign-exchange exposure, the government has funded itself with issuance of local currency instruments in the domestic market in 2010. The central bank and the Ministry of Economics and Finance are working together to allow local instruments to settle via Euroclear, rather than a local custodian. A project is under way to develop market makers for local debt instruments.
Yes Yes N/A N/A T-bills T-bills Yes Yes Yes Yes No No N/A N/A No No Yes Yes Yes 10.0 1.0 50
consensus expectation of inflation at 6.8%% y-o-y for 2011 as tolerable for the central bank. Considering the relatively small credit market in local currency and the high level of dollarization of the economy, we do not see the reference rate as the main effective instrument to anchor inflation expectations. Central bank officials recognize that monetary aggregates are the ultimate target, and that the level of interest rates should be compatible with those targets.
Chart 29. Debt profile
2500
Amortizations
2000
Monetary policy
The Central Bank of Uruguay follows a monetary policy rule based on an inflation-targeting regime, which establishes a target range between 4-6% for 2011 and uses the overnight interbank rate as its key policy instrument. Yet the governments implicit objective is the real exchange rate. The aim is to achieve the highest level of competitiveness compatible with a reasonable inflation level that at times could be outside the target range for inflation. In this sense, we consider the current
Interests
1500
1000
500
Source: Uruguayan central bank
IV .10 I.1 1 II. 11 I II .11 IV .11 I.1 2 II. 12 I II .12 IV .13 20 13 20 14 20 15 20 16
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Central bank notes in UI. These notes have fixed-rate coupons and are issued in tenors that from one to five years. Treasury notes and bonds in UI: Fixed-rate bonds are issued by the central government in UI. Tenors usually go from five to 10 years. Issuance is about USD60m per week. Weekly auctions are periodically preannounced. Global UI bonds: These instruments were issued in the international market and belong to the external debt category. Though payments of interest and principal occur in USD, the Global UI bonds are inflation-linked securities in local currency. These instruments benefit from the fact that no local requirement applies to foreign investors. Being Euroclearable, they trade at a significant premium with respect to similar local instruments. Interest: Semiannual payments are payable at an annual rate of 5.00% on the principal amount outstanding of the bonds as adjusted to reflect Uruguayan inflation from the issue date through the relevant interest payment date. Amortization: Bullet at maturity. The redemption amount is equal to the principal amount outstanding of the bonds as adjusted to reflect Uruguayan inflation from the issue date through the maturity date. Tenor: Long-term, current maturities between 2018 and 2036.
USD local debt
Key policy rates

Interbank interest rate: The average market interest rate (TMM) is derived from overnight interbank operations, including the central bank. The monetary policy rate (TPM) works as a target for the TMM so that the interbank rate does not deviate more than 50bp from the target on a daily basis.

In Uruguay, both the government and the central bank issue bonds. They each sell nominal and inflation-linked bonds. The central government issues bonds locally and abroad. Locally, the government also sells bonds denominated in US dollars, and in international markets it sells global and inflation-linked bonds. The central bank sells bonds only locally. HSBC provides indicative prices for Uruguays domestic government debt securities via Bloomberg page HSUY.
Bonds
Inflation-linked bonds
Unidad Indexada (UI) is a daily index based on the consumer price index published by the national statistic bureau (INE) on a monthly basis. The index is based at 1 on June 2002 and varies on a daily basis according to the following formula, in which d represents the day, M the month, and DM the number of days of month M: UId,M= UI5,M-1 ((IPCM-2)/(IPCM-3))^(d+DM-1 -5/DM-1) for every 1<d<5 UId,M= UI5,M ((IPCM-1)/(IPCM-2))^(d-5/DM) for every 6<d<31 Central bank monetary regulatory notes (letras de regulacin monetaria): These are zero-coupon bonds issued both in UYU and in UI. Tenor may vary; both are mainly shorter than two years. The total amount outstanding is about USD1.9bn. Issuance is about USD5m equivalent on average per auction. Weekly auctions that are periodically preannounced.
Fixed-rate treasury bonds in USD: These are bonds issued locally by the central government and denominated in USD. Tenors usually go from one to two years. These bonds are generally liquid.
Derivatives
Cross-currency swap exists for UYU/USD Libor. Tenors extend to three years, yet most of the liquidity, which is usually thin, is found in the one- or two-year tenor. Settlement takes place over the counter (OTC).
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Foreign exchange
Table 32. Normal market conditions Onshore average daily volume Onshore spot transaction Onshore bid/ask spread Onshore forward transaction Onshore forward spread
Source: HSBC

Regulation
Foreign investors need to appoint a local custodian to settle local debt securities. Custody of local securities, both in UYU and USD, is concentrated by the central bank. Yet some private institutions are starting to offer custody services to investors. As mentioned above, a project is under way to allow foreign investors to access the local market via banks and brokers and settle them via Euroclear. There are no capital controls regarding foreign portfolio investments.
USD20m USD0.3m 5pips USD1.0m 5pips
Useful links
Table 33. Information sources Banco Central de Uruguay (BCU) Ministry of Economy and Finance National Statistics (INE) Montevideo Stock exchange Electronic Stock Exchange HSBC page
Source: HSBC
Settlement
Settlement can take place over the counter (OTC), via the Montevideo stock exchange (BVM) or the electronic exchange (BEVSA). Settlement is typically done on a T+0 basis, but parties can also agree on T+1 or T+2.
www.bcu.gub.uy www.mef.gub.uy www.ine.gub.uy www.bvm.com.uy www.bevsa.com.uy HSUY <GO>
Taxation
There is no taxation related to local debt securities traded by foreign investors.
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Table 34: Uruguay: Bonds Treasury notes in UI Issuer Currency Form Minimum denomination Tenors Coupon/discount Coupon frequency Amortizing schedule Day count Amount outstanding Primary market Auction style Average issue size Auction frequency Participants Settlement Secondary market Trading mechanism Trading hours Quoting convention Average bid-offer spreads Average trade size Volume Settlement Clearing Main participants Finance ministry Inflation-linked Scripless UI1 From one month up to 15 years Coupon Semiannual Bullet or amortizing (1/3 per year in last 3 years) 360 USD2.3bn Dutch single price UI250m 3 times a week Local banks T+1 OTC/BVM/BEVSA 10.00-17.00 Yield up to two decimal places 5-10bp UI5m (USD50k) UI10m (USD1m) T+0, T+1, T+2 BEVSA/BVM/BCU Pension funds, local banks, insurance companies, and brokerage houses Treasury notes in UYU Finance ministry UYU Scripless UYU1 3-8years Coupon Semiannual Bullet 360 UYU11bn No schedule N/A N/A N/A N/A OTC/BVM/BEVSA 10.00-17.00 Yield up to two decimal places//Prices 5bp//5pips UYU20m (USD1.1mn) UYU5m (USD260k) T+0, T+1, T+2 BEVSA/BVM/BCU Pension funds, local banks, insurance companies, brokerage houses, and foreign investors Global CPI linked Finance ministry CPI-linked (traded in USD) Scripless UYU1 2018, 2027, 2030, 2037 Coupon Semiannual Bullet or amortizing (1/3 per year in last 3 years) 360 UYU3.8 No schedule N/A N/A N/A N/A OTC/BVM/BEVSA Global Yield up to two decimal 1bp USD1m Local USD Finance ministry USD Scripless/physical USD0.01 1 month to 9 years Coupon Semiannual Bullet or amortizing (1/3 per year in last 3 years) 360 USD850m No schedule N/A N/A N/A N/A OTC/BVM/BEVSA 10.00-17.00 Price
10pips USD100k USD500k T+3 T+0, T+1, T+2 Euroclear BEVSA/BVM/BCU Local and foreign pension funds, Pension funds, local banks, local Banks, insurance insurance companies, and companies, brokerage houses, brokerage houses and foreign investors Euroclear No No No Local custodian required, final custody on BCU No No No
Regulations for foreign investors Custodian Local custodian required, final custody on BCU Interest income tax No Capital gains tax No Entry/exit No
Local custodian required, final custody on BCU No No No
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Pablo Goldberg, Gordian Kemen, Hernan Yellati and Alejandro Martinez-Cruz
Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice. Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. * HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 2 3 This report is dated as at 14 March 2011. All market data included in this report are dated as at close 11 March 2011, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
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Disclaimer
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This material was prepared and is being distributed by HSBC Securities (USA) Inc., ("HSI") a member of the HSBC Group, the NYSE and FINRA. This material is for the information of clients of HSI and is not for publication to other persons, whether through the press or by other means. It is based on information from sources, which HSI believes to be reliable but it is not guaranteed as to the accuracy or completeness. Expressions of opinion herein are subject to change without notice. This material is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. HSI and its associated companies may make a market in, or may have been a manager or a co-manager of the most recent public offering of, any securities of the recommended issuer herein. HSI, its associated companies and/or their directors and employees may own the securities, options or other financial instruments of any of the issuers discussed herein and may sell them to or buy them from customers on a principal basis. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (SFA) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. 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Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. Copyright. HSBC Securities (USA) Inc 2011, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Securities (USA) Inc. MICA (P) 142/06/2010 and MICA (P) 193/04/2010
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Global Emerging Markets Research Team

Pablo Goldberg Head of Global Emerging Markets Research +1 212 525 8729 pablo.a.goldberg@us.hsbc.com
EM Fixed Income Research

Americas Gordian Kemen Chief Strategist, Latin America +1 212 525 2593 gordian.x.kemen@us.hsbc.com Alejandro Mrtinez-Cruz +52 55 5721 2380 alejandro.martinezcr@hsbc.com.mx Hernan M Yellati +1 212 525 3084 hernan.m.yellati@us.hsbc.com
Economics
Latin America Javier Finkman Chief Economist, South America ex-Brazil +54 11 4344 8144 javier.finkman@hsbc.com.ar Andre Loes Chief Economist, Brazil +55 11 3371 8184 andre.a.loes@hsbc.com.br Sergio Martin Chief Economist, Mexico +52 55 5721 2164 sergio.martinm@hsbc.com.mx Ramiro D Blazquez +54 11 4348 5759 Lorena Dominguez +52 55 5721 2172 Marcos Fernandes +55 11 3847-9787 Constantin Jancso +55 11 3371-8183 ramiro.blazquez@hsbc.com.ar lorena.dominguez@hsbc.com.mx marcos.r.fernandes@hsbc.com.br constantin.c.jancso@hsbc.com.br jorge.morgenstern@hsbc.com.ar
Asia Andr de Silva, CFA Head of Rates Research, Asia-Pacific +852 2822 2217 andre.de.silva@hsbcib.com Virgil Esguerra +852 2822 4665 Ki Yong Seong +852 2822 4277 EMEA Di Luo +44 20 7991 6753 virgilesguerra@hsbc.com.hk kiyongseong@hsbc.com.hk
di.luo@hsbcib.com.
Jorge Morgenstern +54 11 4130 9229
EM Currency Strategy
Asia Richard Yetsenga Global Head of EM Currency Strategy +852 2996 6565 richard.yetsenga@hsbc.com.hk Daniel Hui +852 2822 4340 Perry Kojodjojo +852 2996 6568 Americas Clyde Wardle +1 212 525 3345 danielpyhui@hsbc.com.hk perrykojodjojo@hsbc.com.hk
Emerging Europe, Middle East and Africa Murat Ulgen Chief Economist, Central & Eastern Europe, and sub-Saharan Africa +90 212 376 4619 muratulgen@hsbc.com.tr Simon Williams Chief Economist, Gulf Markets +971 4 507 7614 simon.williams@hsbc.com Liz Martins +971 4 423 6928 liz.martins@hsbc.com
Alexander Morozov +7 495 783 8855 alexander.morozov@hsbc.com clyde.wardle@us.hsbc.com Asia Pacific Qu Hongbin Managing Director, Co-head Asian Economics Research and Chief Economist Greater China +852 2822 2025 hongbinqu@hsbc.com.hk Frederic Neumann Managing Director, Co-head Asian Economics Research +852 2822 4556 fredericneumann@hsbc.com.hk Leif Eskesen Chief Economist, India & ASEAN +65 6239 0840 leifeskesen@hsbc.com.sg Paul Bloxham Chief Economist, Australia and New Zealand +61 2925 52635 paulbloxham@hsbc.com.au Song Yi Kim +852 2822 4870 Donna Kwok +852 2996 6621 Sherman Chan +852 2996 6975 Wellian Wiranto +65 6230 2879 songyikim@hsbc.com.hk donnahjkwok@hsbc.com.hk shermanwkchan@hsbc.com.hk wellianwiranto@hsbc.com.sg
Marjorie Hernandez +1 212 525 4109 marjorie.hernandez@us.hsbc.com
Pablo Goldberg Head of Global EM Research HSBC Securities (USA) Inc. pablo.a.goldberg@us.hsbc.com +1 212 525 8729 Pablo A. Goldberg is global head of HSBC emerging markets research. He joined the firm in 2008 as head of Latin American fixed income research. Pablo is responsible for working across asset classes to build opportunities for HSBCs emerging markets franchise with research strategy ideas across regions. Prior to joining HSBC, he held similar positions at other international investment banks for about 15 years. Pablo has a masters degree in economics from the London School of Economics.
Gordian Kemen Chief Strategist, Latam FI HSBC Securities (USA) Inc. gordian.x.kemen@us.hsbc.com +1 212 525 2593 Gordian Kemen is the chief strategist for HSBCs Latin American fixed income strategy team. He joined the firm in May 2009. Previously, he had roles in emerging-market research at two major investment banks in London and New York, and he was a lecturer and researcher in finance at the University of Mannheim, a German business school. He holds a graduate degree in economics from the University of Konstanz, Germany, and has conducted postgraduate research in finance at the University of Mannheim.
Alejandro Martinez-Cruz Latam FI Strategist HSBC Mexico S.A. alejandro.martinezcr@hsbc.com.mx +52 55 5721 2380 Alejandro Martinez-Cruz joined HSBC Mexico in 2007 as as member of the fixed income strategy team, and since 2009 has focused on strategies and trade recommendations in fixed income markets in Mexico, Peru, and Central America. Previously, he was a financial markets analyst, including a position at the Mexican central bank. He received a masters degree in economics from the University of Rochester in the US.
Hernan Yellati Latam FI Strategist HSBC Securities (USA) Inc. hernan.m.yellati@us.hsbc.com +1 212 525 3084 Hernan Yellati is a member of the HSBC fixed income strategy team, focusing on the Latin American region. He joined HSBC Argentina in 2003 as deputy chief economist and moved to the New York office in 2008. Before joining HSBC, Hernan received a masters degree in economics from Pompeu Fabra University, and he is a Ph.D. candidate in economics from Birkbeck College, University of London.

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Emerging Markets Fixed Income Research March 2011

Latin America Rates Guide 2011

Emerging Markets Fixed Income Research March 2011

Disclosure appendix Disclaimer

Emerging Markets Fixed Income Research March 2011

process of rating convergence and capital account opening deepens

a set of risks and regulations that investors need to be aware of

venturing into local markets

The local markets: Risks and opportunities

Hard currency Same currency Foreign No No Yes Brazil 34

The change in Latin American sovereign balance sheets

Emerging Markets Fixed Income Research March 2011

Chart 1. Brazil: Public external foreign balance sheet

100,000 80,000 60,000

Source: World Bank, BCB

Source: World Bank, BCRA

Chart 4. Mexico debt composition

Source: Brazil National Treasury

Emerging Markets Fixed Income Research March 2011

Chart 5 Accumulated flows since 2007

2,000 1,500 1,000 500 0 1997

Chart 7. Composition of GBI-EM Global Diversified

Chart 8. Composition of ELMI+

Mex ico, 10.0% EMEA, 50.9% Peru, 0.2%

Emerging Markets Fixed Income Research March 2011

Foreign participation varies by market

Chart 10. Mexico foreign participation

25% 20% 15% 10% 5% 0% 1999

% of Total amount outstanding

Source: Respective central banks

Emerging Markets Fixed Income Research March 2011

Local sovereign bonds

Central bank bonds

Local sovereign bonds

Yes N/A N/A Yes

Internal requirements Internal requirements Yes Yes

Yes Yes Yes Yes

Yes No No Yes Yes Yes

Only through banks Yes Yes No Yes Yes

Through banks or stockbrokers No Yes No Yes IRS

No Yes Yes No Yes Yes

No No Yes Yes Yes

Yes No Yes Yes (interest rate swap)

Treasury bonds ARS1.6bn USD1.0m

TES Bonds COP6.0trn COP200bn 2.5bp

MBonos MXN15bn MXN50M 3bp Udibonos MXN5bn MXN30m 3-5bp

Soberanos PEN140m USD50.5m 8bp VACs PEN2.5m USD0.9m 20bp

Bonds USD10.0 USD1.0 50bp

Table B. Region at a glance: Government bonds Argentina ARS- and CPI-linked

Emerging Markets Fixed Income Research March 2011

Brazil (NTN-F and LTN)

Uruguay Notas del Tesoro in UYU

None Local custodian required

Exempted when tax treaty exist, No if not 0.5% No No No No

Emerging Markets Fixed Income Research March 2011

Emerging Market Central Bank Monitor

Emerging Markets Fixed Income Research March 2011

Emerging Markets Argentina March 2011

only 18% of GDP, according to our estimates

Chart 11. Argentine local debt composition (excluding restructured debt)

24% 28% ARS Badlar-linked USD Bodens

5.8 1.5 Boden 2013 Bonar V Boden 2015 Bonar X

ARS Nominal USD Bonars