Moody's assigns to Asigna a Baa1 clearing counterparty rating with a stable outlook; withdraws A3 issuer rating

Moody's de México today assigned a Baa1 long-term global local currency clearing counterparty rating (CCR) and a Aaa.mx long-term Mexican National Scale CCR to Asigna, Compensación y Liquidación. The outlook on all ratings is stable.

Moody's rating actions on Asigna follow the implementation of Moody's rating methodology for Clearing Houses in Mexico on 9 February 2016 (see "Rating Methodology: Clearing Houses," 7 January 2016).

The following ratings were assigned to Asigna:

- Long-term global local currency clearing counterparty rating of Baa1, stable outlook

- Long-term Mexican National Scale clearing counterparty rating of Aaa.mx

RATINGS RATIONALE

NEW CLEARING HOUSES METHODOLOGY

With the implementation of the Clearing Houses methodology in Mexico, Moody's is transitioning the ratings of Asigna to this new methodology from the company's previous categorization under the Global Securities Industry Methodology. Related to the assignment of CCRs, Moody's has withdrawn the long-term global local currency issuer rating of A3 and long-term Mexican National Scale issuer rating of Aaa.mx of Asigna.

ASIGNA'S CCR IS SUPPORTED BY MODERATE COUNTERPARTY RISK AND RISK MANAGEMENT AND A STRONG CLEARABILITY OF PRODUCTS

As the sole derivatives clearing house in Mexico, Asigna's Baa1 clearing counterparty rating (CCR) benefits from a strong clearability of products, a moderate counterparty strength based on a highly rated but concentrated membership, moderate risk mitigant strength based on ongoing efforts Asigna is currently undertaking to become IOSCO compliant and supported with relatively sophisticated and conservative safeguards against defaults, and a moderate competitive positioning that reflects increasing competition in its domestic market. The Baa1 CCR also includes one notch of government support reflecting moderate probability of financial support from the Mexican Government should Asigna face financial stress.

Asigna has a narrow focus on exchange traded derivatives whose clearability we assess as strong. Futures on the US dollar and the 28-day interbank equilibrium interest rate (TIIE) represented almost 80% of Asigna's total volumes, as of September 2015.

Asigna's clearing members include most of Mexico's largest and most highly rated financial institutions, including BBVA Bancomer, S.A., Banco Nacional de México, S.A. and Banco Santander (México), S.A., whose counterparty risk (CR) assessments are A2(cr), and Scotiabank Inverlat, S.A., whose CR Assessment is A3(cr), as well as other less active players including JPMorgan México (unrated), Grupo Bursátil Mexicano (GBM, unrated) and Actinver Banco, S.A. (unrated). However, just four of Asigna's clearing members compose almost 100% of volumes, exposing the clearing house to a high level of concentration risk among its counterparties.

Moody's moderate risk mitigant strength for Asigna considers that the clearing house has not fully met IOSCO's Principles for Financial Market Infrastructure (PFMIs). However, Asigna is making significant efforts to reform its governance and risk management standards in order to achieve compliance and was deemed a third-country central counterparty by the European Securities and Markets Authority (ESMA) in January 2016. Moody's expects the company to IOSCO's principles in the short- to medium-term. Notwithstanding Asigna's current lack of compliance, it has exhibited a sound track record of risk management since inception in 1998, supported by a well-formulated margining methodology and sound liquidity arrangements. Asigna's risk management processes protected it during the height of the financial crisis when the clearing house actively recalibrated its margin parameters to account for spikes in market volatility. However, a delay in Asigna's efforts to adhere to industry best practices would prompt a reassessment of the company's risk mitigant strength, especially since it would also affect the company's ability to regain the losses in volume and profitability that affected its competitive position during 2015.

A sharp decline in Asigna's clearing volumes and profitability in 2015 underscores its vulnerability to competitive threats, notwithstanding its role as Mexico's sole derivatives clearing house. Asigna lost substantial trading volume last year because many Mexican pension fund managers (afores) closed their positions with the clearing house because of local rules on derivatives valuations as well as other clients that transferred much of their business to the CME. In addition, given Asigna's lack of international recognition, the CME made significant market share gains in the clearing of some of Asigna's main products. Consequently, during 2015, Asigna's open interest plunged 18%, revenues declined 30% and cumulative net income declined 84%. Asigna nevertheless remained profitable given its lean operating structure and absence of debt.

Moody's opinion regarding Asigna's moderate competitive positioning reflects the rating agency's expectations that clients and members engagement will rebound once the local rules on derivative valuations are clarified, which Asigna expects to occur shortly. Moreover, Moody's expect that new Mexican regulations that aim to reduce counterparty risk in derivatives trading by requiring higher capitalization requirements for over-the-counter derivatives (OTC) and the April 2016 deadline for all standardized OTC derivatives to be cleared through a clearing house, as well as fully achieve international standards, will also benefit the company's volume and profitability. Nevertheless, it remains uncertain if Asigna's former clients who have transferred their business elsewhere will be interested in returning.

GOVERNMENT SUPPORT

Asigna's Baa1 CCR incorporates a moderate probability of support from the Mexican government (A3 stable). Moody's believes that although Asigna is small, it retains a unique franchise within the Mexican financial system, as the sole derivatives clearing house in Mexico. As such, Moody's believes that the Mexican government has an interest in supporting Asigna in order to maintain an open, efficient and competitive market.

WHAT COULD CHANGE RATING UP/DOWN

Negative ratings pressure would accumulate if Asigna does not achieve full adherence to IOSCO's PFMIs by the end of 2016, or if Asigna's volumes do not to recover as currently anticipated. A weakening of the company's waterfall resources as a result of the rising competitive threats it faces would also put downward pressure on the rating or any significant operational failure that would present a material reputational damage that could result in clients and members attrition.

Asigna's CCR could face upward pressure if the company's risk management operations exceed industry best practices, including those set forth by IOSCO, and if its counterparties become more diversified.