Goodbye and a Fond-eo welcome

Mexico will replace its benchmark 28-day interbank equilibrium interest rate (TIIE) with a new risk-free rate (RFR), TIIE de Fondeo (F-TIIE or Funding TIIE), at the end of this year.

The 28-day TIIE is calculated by the Banco de México (Banxico) on each business day for a term of 28 days, based on quotes submitted by financial institutions interested in participating in the determination of the rate.

Therefore, this rate does not satisfy the international criteria for reference rate, which is poised to be based on transactions observed in Mexico’s money market.

The 91-day and 182-day TIIE have already transitioned to the new F-TIIE from January 1, 2024.

The overnight F-TIIE is based on actual transaction data. It is computed using wholesale overnight repurchase agreement (repo) transactions denominated in Mexican peso, settled by banks and brokerage firms.

The repo transactions are secured by debt instruments issued by the Mexican federal government, the Mexican Bank Savings Protection Institute (IPAB) and Banxico.

The overnight F-TIIE is calculated as a volume-weighted median of interest rates paid on Mexican peso-denominated repo transactions.

Banxico has been publishing the overnight F-TIIE since January 2020. The new rate is being increasingly used for cash market contracts, such as corporate bonds issuance, floating-rate notes, syndicated loans and certificates of deposit.

That said, the derivatives market is not up to speed in adopting the new rate.