Santiago Principles Self-Assessment

Budgetary Income Stabilization Fund

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  • Pillar 1: Legal
  • Pillar 2: Institutional
  • Pillar 3: Investment
Principle 1

1. The legal framework for the SWF should be sound and support its effective operation and the achievement of its stated objective(s).

1.1. The legal framework for the SWF should ensure legal soundness of the SWF and its transactions.

1.2. The key features of the SWF’s legal basis and structure, as well as the legal relationship between the SWF and other state bodies, should be publicly disclosed.

The legal framework and main objectives for Mexico’s SWF are clearly defined in i) the Budget and Fiscal Responsibility Law (hereinafter BFRL), and ii) the Agreement that establishes the Rules of Operation for the Budgetary Income Stabilization Fund (hereinafter BISF). The framework is designed specifically to establish a sound and effective operation for the BISF, ensuring the achievement of its objectives.
The BFRL defines obligations and procedures to ensure fiscal sustainability and to promote the implementation of countercyclical policies. In line with this, the BFRL
establishes the creation of a SWF (the BISF) with a clear mandate aligned with its goals.
Mexico’s SWF is constituted by assets managed in a Public Trust with direct legal relationship with the Federal Government.

The Ministry of Finance serves as the Settlor of the Trust, and one of the Federal Development banks, “Nacional Financiera” (hereinafter NAFIN), serves as the Trustee.
The legal framework and supporting documentation delineating Mexico’s SWF, as well as its rules of operation, key features are publicly disclosed and can be found in the official websites of the Congress and the Official Gazette of the Federation.
- Rules of the Budget and Fiscal Responsibility Law
- Agreement that establishes the Rules of Operation for the Budgetary Income Stabilization Fund

Principle 6

6. The governance framework for the SWF should be sound and establish a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in the management of the SWF to pursue its objectives.

The BISF is established as a Public Trust, and consequently, its governance framework is defined in the Trust Contract (“The Contract”).

 According to this:
• The Economic Planning Unit (EPU), which belongs to the Ministry of Finance, is responsible for overseeing that the Trust’s resources are applied for the stated purposes.
• A Technical Committee, integrated by the Undersecretary of Finance and Public Credit, the Undersecretary of Revenues and the Undersecretary of Expenditure, is responsible for i) authorizing the amount of resources to be used to fulfil the Fund’s objectives, ii)
approving monthly financial statements and iii) determining the portfolio’s currency composition, among others.
• NAFIN manages the Trust and, in order to distinguish the federal resources from operations related to the BISF, may create subaccounts.
• NAFIN must make use of the Mexican Federal Treasury (hereinafter “TESOFE”) to manage the Fund’s resources.
• For the implementation of hedging programs aimed to contribute with the stabilization of the Federal Government’s revenues, the Federal Government can request the Central Bank’s intermediation (as the Financial Agent of the Federal Government) to comply with such purpose.

Principle 18

18. The SWF’s investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio management principles.

18.1. The investment policy should guide the SWF’s financial risk exposures and the possible use of leverage.

18.2. The investment policy should address the extent to which internal and/or external investment managers are used, the range of their activities and authority, and the process by which they are selected and their performance monitored.

18.3. A description of the investment policy of the SWF should be publicly disclosed.

The management of the Fund’s deposits, as stated in the Trust Contract, will rely upon on the TESOFE. Therefore, the legal framework that defines the investment strategy is provided by three main sources: the TESOFE Law, the TESOFE’s Regulation Document,
and the Investment Guidelines designed by the TESOFE’s Technical Committee. The first two layout broad outlines and principles of its management policies, meanwhile the third specifies details on the portfolio investment strategy. Due to the Fund’s nature, the investment strategy is passive management, focusing on maintaining low risk and high liquidity. This framework fulfils the principles of a sound and strong portfolio. The BISF’s investment policy is guided by sound principles that guarantee efficient management through clearly defined control mechanisms. The maximum weights of investment vary among instruments. The less risky assets –such as government bonds and bank deposits– have, by far, a greater maximum weight in portfolio assets than those with high financial volatility. The same criteria apply for the time horizons: longer horizons are compatible with safer assets. For the implementation of hedging programs aimed to contribute with the stabilization of Federal Government’s revenues, the Federal Government requests Banco de Mexico’s intermediation to invest BISF resources in the acquisition of financial derivatives to reduce the exposure of Federal Government revenues according to the approvals of the Technical Committee. The BISF operates under a public framework that offers the necessary information for a broad understanding of the investment policy.