policy path so as to achieve long - term macroeconomic and financial stability, while enhancing monetary policy autonomy. to achieve this, it is imperative to : promote healthy balance sheets, both public and private. • avoid excessive leverage. prevent balance sheet mismatches. develop efficient labor and product markets ; and strengthen institutions and the rule of law. international reserves as a means to absorb shocks and temper financial market volatility notwithstanding the progress in promoting sound fundamentals and financial markets ’ development, there will be episodes of extreme volatility that will require financial authorities ’ intervention to address market dysfunctions. a clear example is the covid - 19 pandemic. around the globe, policy responses to covid - 19 were broad - based and heterogeneous. advanced economies ( aes ) responded with large monetary stimulus and massive fiscal packages to stimulate the economy. emes, with intrinsically less policy space, also loosened monetary policy and adopted fiscal measures in a more limited and heterogeneous way as compared to aes. central banks in emes also responded to market dysfunctions in the early days of the crisis by providing ample liquidity and intervening in their fx markets, using their international reserves either directly or indirectly. in this regard, international reserves are usually held to meet a range of objectives. nonetheless, their role in providing support to conduct fx policy and their function as a shock absorber when facing tail risks, are two of the most relevant functions that help to attain the core objective of central banks : price stability. 2 / 5 bis central bankers'speeches in that regard, i ) adequate fx market development, and ii ) appropriate reserve management practices provide support to sound macroeconomic management and strengthen a country ’ s resilience to shocks. both of these elements require a sound strategy to meet the three key objectives of reserve management : first, liquidity. making sure that sufficient resources are immediately available to provide fx liquidity if needed. second, capital preservation. having a comprehensive and solid framework to assess risks, including interest rate, exchange rate, credit, legal, and operational risks. third, return. once the previous two principles have been fulfilled, achieving the highest possible risk - adjusted returns. from a practical perspective of reserve management, banco de mexico has significantly expanded its investment guidelines to enhance the risk - return profile of its portfolio, while meeting all liquidity and capital preservation objectives. it has also adopted new prospective methodologies based on market prices to guide its strategic asset allocation,

constructing market - based densities to optimize forward - looking portfolios. the strategy has also evolved to become more active tactically, to further enhance the return of its assets. in terms of diversification, the bank has complemented its traditional asset class diversification approach with regime - diversification analysis, risk - factor diversification techniques, and different investment strategies, including total - return portfolios. an additional aspect for effective fx intervention is to follow a well - defined strategy with clear objectives. in mexico, for over two decades, the fx commission ( formed by the ministry of finance and banco de mexico ) has fully committed to the flexible exchange rate regime by avoiding to send signals about any desired levels for the exchange rate, and by defining two clear goals for fx interventions. first, when appropriate, the commission has adjusted the pace of foreign reserve accumulation under preannounced rule - based mechanisms. second, in episodes of high volatility that could compromise the price discovery process, it has provided liquidity to markets. in this case, the fx commission considers interventions as the exception rather than the rule. finally, an effective intervention also depends on the use of appropriate instruments. in this regard, it is essential that intervention tools evolve together with the changing dynamics of foreign exchange markets. let me give you two examples. today, 80 % of the trading of the mexican peso takes place off - shore or without a domestic resident involved. in line with this, the fx commission has enhanced its intervention toolkit further by including the possibility of intervening with international financial institutions in asian and european hours, when liquidity could be compromised. another important consideration has been the recent decline in oil production in mexico and the lower oil prices since 2014. as a result, mexico ’ s state - owned oil company, pemex, has not been selling usd to banco de mexico as it did before, so the traditional main source to accumulate international reserves has waned. in this environment, the fx commission needed a mechanism to prevent international reserves from decreasing, while supplying foreign currency, so it introduced in 2017 non - deliverable forward auctions settled in mexican pesos. all in all, mexico ’ s floating exchange rate regime strategy, along with upgrading international reserve management and fx interventions, contributed to support the development of a deep and liquid fx market, with an efficient price discovery process both at normal times and during stress episodes. this is a key component of banco de mexico ’ s inflation targeting monetary policy framework,