If the typical tesobono fell by 15 percent in dollar value, the value of the collateral in the tesobono swap of the earlier example would have fallen significantly; and a margin call would immediately have been sent to the Mexican bank. Alternatively, anticipating margin calls, the Mexican bank would immediately have sought dollar liquidity in preparation. To restore margin, the $16 billion in swaps would instantly generate $16 x . 15 = $2.4 billion of demand for dollars by the Mexican banks.
Market participants have characterized the market in offshore Mexican equity swaps as very large, but they were not as explicit about orders of magnitude as in the case of tesobonos, though several have claimed up to $3 billion notional value of such contracts existed at the time of the crisis itat on.
With the collapse of the peso, the stock market fell immediately by about 50 percent in dollars and by 66 percent within two months. With the margin in the equity swaps more than wiped out, margin calls or anticipations of margin calls again forced the Mexican banks to rush for dollar liquidity. Taking $3 billion as the notional value of outstanding equity swaps, this would have required the banks to find and additional $1.5 billion at the time of the December 19, 1994 devaluation. Mexican institutions and individuals engaged in these swaps had to sell pesos to get margin or close out their position, adding to the turmoil of the exchange and stock markets.
The total of margin calls from tesobono and equity swaps alone was about $4 billion. Coincidentally, this was approximately that amount that the Banco de Mexico’s reserves fell in the final attack just before the peso was allowed to float on December 21, 1994.19 Structured Notes During 1994, Mexican financial institutions took large positions in structured notes with investment houses in New York.20 Because the notes were reported by the banks as dollar assets, however, the accounting rules in Mexico allowed them to be booked as a dollar position, so that they were not counted against the regulatory net currency position limit of a maximum of 15 percent of capital.
The first group of these structures were known as ajustabono structures and were first noticed when consolidated regulation was implemented in September, 1994. The second group were similar to the structured note discussed earlier and came to the attention of authorities just after the December, 1994 devaluation.
Ajustabonos are inflation-indexed Mexican government securities that had long been held by Mexican banks. In addition, to paying a relatively fixed real interest return, ajustabonos could be counted as foreign exchange assets in determining regulatory foreign exchange positions, so Mexican banks funded their ajustabono positions with dollar borrowings. When real interest rates rose in 1992, Mexican banks found that their ajustabono positions were frozen because they did not want to realize the capital losses on their investment portfolios. The solution was to contract structures with New York banks and investment houses through which the ajustabonos could be used as collateral.