Fitch Ratings – Monterrey – 25 Aug 2023: Fitch Ratings has affirmed Contraparte Central de Valores de Mexico, S.A. de C.V.’s (CCV) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BBB’ and Short-Term Foreign and Local Currency IDRs at ‘F3’. Fitch has also affirmed CCV’s Long- and Short-Term National Ratings at ‘AAA(mex)’ and ‘F1+(mex)’, respectively. The Rating Outlook for the long-term ratings is Stable.
IDRs Driven by Parent Support: CCV’s IDRs and National Ratings are driven by the ability and propensity of its ultimate parent, Bolsa Mexicana de Valores, S.A.B. de C.V. (BMV) to provide timely support, if required. In its assessment, Fitch also factors in that CCV’s operations are highly integrated with BMV’s operations, and therefore no Shareholder Support Rating is assigned.
Ability to Support: Fitch’s assessment of BMV’s ability to support its subsidiary considers its ‘BBB’/Stable IDR and that any needed support would likely be manageable relative to BMV to provide it. As of June 2023, CCV’s net income and equity were a small portion of the group, at 7.1%% and 5.8%, respectively.
Key Role for Parent’s Operations: Fitch’s assessment of BMV’s propensity to support CCV considers CCV’s key role as the sole central counterparty clearing house (CCP) for the stock market in Mexico with high importance. Due to this significant role, Fitch also considers with high importance the huge reputational risk that the default of CCV would constitute for its parent and the high integration with BMV’s operations.
National Scale Ratings: CCV’s national scale ratings are relative rankings of creditworthiness within Mexico. The Outlook on the Long-Term National Rating is Stable as the agency does not anticipate negative changes in local relativities.
Financial and Business Profile Assessment: CCV’s financial performance and business prospects have a moderate importance for Fitch’s support assessment.
Strong Risk Management Framework and Technological Platforms: CCV has reinforced its risk management framework through the implementation of the Cover One Stress Test, which is part of the Principles of Financial Market Infrastructures (PFMI) and the liquidity factors for Conditional Value at Risk. The entity still faces the challenge of successfully completing the migration to T+1 from T+2 for securities transactions operated in the United States and Canada, expected to be completed by mid-2024. CCV has also exhibited a high systems availability (June 2023: 100%, March 2023: 99.87% and 2022: 99.93%) above its internal limits. Operational risk management is aligned with its parent’s policies and a default to activate its financial safeguard net has yet to occur during the history of its operations.
Exposure to Counterparty Risk and Compliance with PFMIs: CCV’s counterparty risk is high due to elevated counterparty concentrations. As of 1H23, around 80% of its operated volume was concentrated in 10 clearing members of a total of 29 clearing members. CCV has reinforced its risk models to control this exposure, including an add-on for Margin Funds of members with higher exposure. CCV is also working on an additional process to reduce member fails. Regarding the compliance with PFMI, CCV still faces the challenge of finalizing their implementation due to pending approvals from the regulator.
Unique Market Position but Concentrated Operations: CCV has a long track record as the unique stock CCP in Mexico, which benefits its business position that is underpinned by high entry barriers due to strict regulation. Fitch considers CCV’s concentrated business model in terms of the products and services oriented to the stock market in its analysis. However, the entity is working toward the implementation of additional products and services, which are being reviewed by the local regulator.
Steady Financial Performance: In Fitch’s opinion, the company’s financial performance is supported by equity funded operations and good liquidity management through prudent investment policies for the guarantee funds. CCV’s profitability metrics are sound, and reflect relatively stable revenue generation and controlled operating expenses. As of June 2023, CCV’s adjusted EBITDA to total gross operating income indicator was 58.4%, the same as the average of the last four years.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
–A deterioration in BMV’s ability and/or propensity to support CCV could trigger a downgrade of its IDRs, but this is not Fitch’s base case scenario as the agency views CCV as core subsidiary of BMV;
–A downgrade of CCV’s national scale ratings would reflect a negative change in local relativities.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
–There is limited upside potential for CCV’s IDRs. The IDRs are already one notch above Mexico’s IDRs, which have a Stable Outlook. The IDRs could only be upgraded in the event of an upgrade of BMV’s IDRs;
–CCV’s national scale ratings are at the highest level on the national scale; therefore, they cannot be upgraded.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
SUMMARY OF FINANCIAL ADJUSTMENTS
Pre-paid expenses and other deferred assets were reclassified as intangibles and deducted from total equity to reflect their low loss absorption capacity.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
CCV’s ratings are driven by Fitch’s appreciation of the ability and propensity of support from its ultimate parent Bolsa Mexicana de Valores (BMV; BBB/Stable).
The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores
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Source : Fitch Rating