An article by Guadalupe Ornelas of National Law Center for Inter-American Free Trade. Guadalupe Ornelas is a lawyer based in New York.

Relevant links

For securitization market in Mexico in general, see our country profile – click here

For another (earlier) article on securitization in Mexico – click here

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In the United States, much has been written about the country’s uninterrupted boom in the past decade giving credit therefor to electronic communications and new technologies.

Little, however, has been said about a crucial factor that has reinforced the United States economy: the capital markets –a powerful vehicle that when properly accessed– revolutionizes the way moneys flow from lenders to borrowers (1)

Over the past decade, the United States and a few other developed countries have produced what thus far appears to be a "much more stable financial system based almost entirely by markets rather than banks"(2)

However, for all their advantages, derivatives and all the other financial tools of the new economy, which have undoubtedly given economists,lawyers and financiers unprecedented innovation, originality, and elasticity , they have also brought in unknown intricacies and new challenges.

In the United States , a crucial financial tool in this decade of financial novelties has been the fast evolving use of asset-backed securities, also known as securitization. Securitization has played a crucial role to access the capital markets to all kind of players.

With this tool, securities are issued by lenders (not necessarily banks) which are backed by their own loan portfolios. In the third quarter of the year 1999, asset-backed securities outstanding in the United States was $2.96 trillion dollars – according to the American Board Market Association- . That is much more than the $374.5 billion dollars in the mid 80’s, when this mechanism was originated.

Before the existence of asset-backed securities , or securitization, the heavy risk of lending used to land on the bank solely making the loan. Bankers would sell their securities to numerous worldwide investors, who would take only an insignificant portion of that risk. During those years, if a business went bust, the business would haul a significant number of good creditors with them, who would then have an extremely difficult time getting credit back.

By contrast, through securitization, if a major business borrower goes broken , that business is probably just a $.1,000 commercial mortgage-backed security

bond in some portfolio’s manager in a certain state, and the rest of this portfolio will be unaffected. "In a securitization the risk is shared among so many more risk-takers, that people don’t stop lending"

business would haul a significant number of good creditors with them, who would then have an extremely difficult time getting credit back.

By contrast, through securitization, if a major business borrower goes broken , that business is probably just a $.1,000 commercial mortgage-backed security

bond in some portfolio’s manager in a certain state, and the rest of this portfolio will be unaffected. "In a securitization the risk is shared among so many more risk-takers, that people don’t stop lending"(3)

Having stated the fundamentals of securitization as an innovative, highly efficient financing mechanism, let us go to the core of this article, which is why we believe that Mexico has, and continues to pave the road for entering and reaping the advantages of the capital markets through cross-border securitizations.

First, one thing that applies to Mexico and any country must be made very clear, markets in the international arena are not likely to flourish unless traded instruments are standardized and in sufficient amounts and denominations as to attract investors. Moreover, potential investors must have available to them information at relatively low-cost about the issuers [of the securities]and borrowers.(4) With this respect, it is imperative to mention the incredible results that Moody’s Investors Services in Mexico, as well as Fitch IBCA the International Rating Agency (known as CLASE in Mexico) have accomplished; they have provided consulting to the main Mexican secondary market servicers, supplied them with clear guidelines as to how to improve underwriting techniques with respect to financial traded instruments, origination; adequate servicing, know-how as to how to monitor the quality of the instruments and their servicing for investors and borrowers, the adequacy and need of newer technology and, last , but not least, advice on the standarization of the traded financial instruments.

Although numerous factors are considered important to effect cross-border securitizations, there are only two t factors we will cover in this article: economic and legal.:

  1. Mexico’s Current Economic Accomplishments

Little is known, in certain spheres, of the United states and even Mexico of the successful efforts of the Mexican authorities in a) lowering the country’s inflation and, b) its struggle to obtain International Investment Grade Status for the country.

  • Lower Inflation: In January of 2000, Mexico’s inflation rate was 1.34% and the annual inflation in the year 1999 was 11%, which according to the Governor of Banco de Mexico (Mexico’s central official bank) places Mexico on track for performance in the capital markets in single digits later in the year 2000. "This fact,[ as published in a recent Financial Times Journal(5)] bolsters hopes that {Mexico} will shortly achieve investment grade credit status and finally overcome the 1994 tequila Crisis"
  • Struggle to Obtain International Investment Grade Status

During the second week of February, Moody’s Investor Services placed Mexico on review for a possible rise to investment grade. Luis Ernesto Martinez, Moody’s Chief Mexico Analyst said " [he] expected the review to be completed within 1 to 3 months, which meant an upgrade was possible before presidential elections on July 2, 2000 [he added that] at least two –thirds of Moody’s reviews resulted in a rating change"(6). This great documented piece of information signals, even to the regular skeptics, that there is an awareness outside of Mexico that there is a favorable development with respect to the country’s economic policy.

The Mexican Minister of Treasury, Miguel Angel Gurria said "this information should be a wake-up call for investors, telling them this is a serious country with a sound economic policies and good medium and long-term economic prospects."(7)

This news may come at a particularly good time for Mexico, since a special United States congressional commission is expected to recommend next March radical reductions in the roles of the International Monetary Fund and the World Bank vis-à-vis Latin America ( institutions which in the past have aided the Mexican economy a great deal). The Commission is likely to call for the World Bank to pull out of Asia and Latin America, leaving the ground to the two regional institutions, the Asian and InterAmerican Development Banks(8)

2. Is there a Mexican Law Governing Cross-Border Securitization Transactions with the United States?

Tamar Frankel(9)sates that " a puzzle posed by cross-border securitization— which is a financing mechanism uniquely suited to cross national borders—relates to the nature to the law that governs it. . By definition, cross-border securitization is not governed by one or even two legal systems(10)

The law of cross-border securitization consists of two or more countries’ laws, usually chosen by private individuals involved in the transaction. Therefore, the essence and identifying factors of these laws are not uniform.

We concur with the opinion of Professor Frankel in that that uniform laws established by a centralized law maker are not likely to be as efficient as market laws, or customs originated and replicated by individuals that ultimately acquire the status of laws. ( It should be noted that replicated business customs over time also acquire law status under the Mexican legal system as well).

While individuals continue to create ad hoc unique transactions, they also gradually work toward more uniform laws. Accepted and replicated contracts and projects gradually become "boiler plate" or "vanilla" documents emerging as customs, which, in turn, are adopted as model contracts and rules by trade professionals associations, organizations of intermediaries, international private committees and regulators’ organizations. All these represents modern "merchant law ", eventually absorbed into domestic law that enables securitization(11)

The movement to unify securitization law has appeared in various fronts. Regulators are fostering unification on the international level(12); others are advocating alternatives to uniform substantive securities regulations by reducing investors’ information costs through private individuals and entities such as rating agencies and investment company managers(13). Some countries have adjusted their laws along private international model laws(14) Some other countries have adjusted their laws in light of foreign laws in full, directly or by reference.

The United States did not enact a model law to securitize, but legislated to meet particular problems in the tax, securities regulations and commercial areas. Mexico has, relatively recently, amended the Civil Codes of most of its states to allow transfer of financial assets, and there is currently a law proposal in the Mexican Congress to enact REITs legislation (which is modeled after the United States legislation of UP REITs.

Organizations like the National Law Center for Inter-American Free Trade are preparing model forms and laws(15) Thus, the law of securitization is being developed in the markets by merchant communities and by governments.

According to Professor Tamar Frankel, securitization was invented to address problems caused by a transformed environment that existing institutions [banking and other similar ones] failed to solve.

Cross-border securitization was invented to address problems caused by existing legal and business environments that failed to facilitate the securitization process.

Securitization law can be enacted by central law makers, such as governments, and acquire the force of law on passage; cross-border securitization, by contrast starts in market lawmaking, which offers more freedom from institutional constraints and incentives to innovate. Yet, neither market law nor government law can flourish, without uniform, predictable and stable rules that govern their participants’ activities.

Market law making and central law making must complement each other. Professor Frankel (16)states that it is not likely that a uniform law of cross-border securitization will be enacted by a lawmaker any time soon, but, when it does, it will probably originate from a composite of entities such as the World Bank, International Monetary Fund, legal research centers, cooperating governments and private individuals in different countries looking for a more consistent institutional and legal infrastructure, and who will continue to create private agreements that by replication over time, will become custom law and consequently, enforceable.


How (1), then, did cross-border securitization has already taken place between the United States and Mexico? And how come the cross-border projects and ideas therefor continue to rapidly proliferate? Thus far, these transactions have been effected under the United States law, which fully enables cross-border securitization transactions, and also under the recent amendments in the Mexican legislation stated above, among others, those which enable the transfer of financial assets under certain circumstances.

" Cross-border securitization is indeed without law in the traditional sense, but it is certainly not lawless"(17)

1 Jacob M. Schlesinger :" Why The Long Boom? It Owes Big Debt To The Capital Markets" Wall Street Journal (Feb.1st, 2000)

2 Hall Robert, Stanford University Economist, Head of the Committee of Scholars Who Officially Date Business Cycles, quoted in the Wall Street Journal supra.

3 Reilly Tierny, research analyst for Fox-Pitt, Ketton, Inc. in New York.

See Jack M. Guttentag & Richard J. Herring, Financial Innovations to Stabilize Credit Flows to Developing Countries, Brookings Discussion Papers (Intl. Econ. No. 33, 4-6,(1985) (unpublished); Paula C. Murray & Beverly L. Hadaway, Mortgage-Backed Securities An Investigation of Legal and Financial Issues, 11 J. Corp. L. 203-204 (1986).

5 Henry Tricks, contributor to the Financial Times Journal, World News Section ( Feb. 3, 2000).

6 Luis Ernesto Martinez, Moody’s Chief Mexican Analyst , quoted in the Financial Times Journal, World News Section (Feb. 7, 2000).

Quoted in the Mexico City News (Feb. 10, 2000).

See Financial Times World Business Newspaper, New York City (Feb. 24, 2000).

9 Professor of Law, Boston University School of Law: "Cross Border Securitization: Without Law But Not Lawlwess: 8 Duke J.of Comp. & Int’l L. 255 (1998).

10 Laws including the process include borrrowers’ and creditors’ rights, bankruptcy, regulation of financial institutions, and taxation to intermediary entities or investors. Cross-border-securitization may also involve legal issues that relate to all international transactions such as jurisdiction, choice of law, extra territorial application of foreign laws, sovereign immunity and doctrine of act of state. See Merrit B. Fox, The Legal Environment of International Finanace: Thinking About Fundamentals.17 Mich. J. Int’l L., at 729 (1996).

11 The modern international law merchant is being developed in many areas such as swaps. See Adam R. Waldman, OTC Derivatives & Systemic Risk: Innovative Finance or the Dance into the Abyss?, 43 AM. U.L. REV. 1023, 1060-61 & nn.257-58 (footnotes omitted) (citing Daniel P. Cunningham & Paul Michalski, Enforceability under Various Bankruptcy Laws of the Automatic Termination and Netting Provisions of the ISDA Standard Form Agreements, in ADVANCED SWAPS AND DERIVATIVE FINANCIAL PRODUCTS, at 227,231 (PLI Corp. L. & Prac. Course Handbook Series No. 746, 1991); See also David Crowling, Cross-Border Insolvencies: Building a Framework, AUSTRALIANACCT., Aug. 1997, at 48 (" The insolvency community has begun trying to full the vacuum [concerning insolvency of multinational enterprises] stepping up their efforts to establish a protocol for resolving issues that arise when companies worldwide operations and assets go under").

12 See,e.g., TRANSNATIONAL INSOLVENCY PROJECT: INTERNATIONAL STATEMENT OF UNITED STATES BANKRUPTCY LAW (Tentative Draft 1997). See also Kelllye Y.Testy, Comity and Cooperation: Securities regulation in a Global Marketplace, 45 ALA. L. REV. 927, 955-56 (1994) (noting that SEC’s acceptance of comity and cooperation "represents a profound philosophical shift and one that recognizes the globalization of the world’s securities markets").

13 See Stephen J. Choi & Andrew T. Guzman, National Laws, International Money: Regulation in a Global Capital Market, 65 FORDHAM L. REV. 1855 (1997.)

14 See Emil Arca, Cross-Border Securitization, REV. BANKING & FIN.SERVICES, Feb. 14, 1996 at 21 (defining cross-border securitization transactions).

15 See National Law Center for Inter-American Free Trade, Secured Financing (visited Nov. 13, 1997).

16 See FRANKEL,supra note 9, at 256.

17 See id., at 69.

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