The Mexican Derivatives Exchange is
increasingly seen by global players as an
opportunity to diversify their listed derivatives
product offering. Customers at home and
abroad are taking more interest in this
exchange's products, due to a large degree to
the decline in inflation and the perceived
growth and stability of the Mexican economy
and the Mexican peso. The exchange itself is
taking steps to encourage greater foreign
participation by adopting new business
practices and removing critical tax and legal
disincentives. Global players are continually
looking to markets outside the "Big Four"
exchanges for new profit opportunities, and
Mexder fits the bill in more ways than one.
What distinguishes Mexder from many
other markets in the developing world
is its willingness to adapt to international
business practices. Like most other
exchanges established in the last 10 years or
so, the exchange is totally electronic. Unlike
many other exchanges in the developing
world, however, Mexder no longer demands
that trading members of the exchange have
a physical presence in the country. In
October the exchange authorized remote
trading, a step welcomed by global futures
firms. Another crucial difference is in clearing
and settlement. Mexder's clearinghouse,
Asigna, uses algorithms based on risk-based
margining that are relatively easy to replicate.
This again is welcomed by global
futures firms. The exchange also permits
omnibus accounts and has worked closely
with the government to eliminate tax issues
that caused many institutional hedgers to
take their business offshore.
Last but not least, Mexder's product
development strategy has targeted the
demand for products to manage new and
existing risks in the Mexican economy. In
particular, it has succeeded in developing a
very active market for short-term interest
rate futures. Its TIEE 28 futures contract
plays a central role in the hedging of interest
rate risk in Mexico, and it has become one of
the most actively traded futures contracts in
the world. Recent changes in pension fund investment rules could make another big
success out of its equity index futures and its
new line of single stock options.
To understand the success of this futures
exchange in recent years, it is worthwhile
examining the underlying factors in some
detail. First, the exchange benefits from
strong support from the government.
Mexder was created in December 1998
under the auspices of the central bank,
Banco de México, and the ministry of
finance, Hacienda, as part of a long-term
plan to develop the Mexican financial markets.
The authorities continue to provide
support to the exchange. For example, candidates
for Mexican primary dealer status
gain significant credit for active participation
on the exchange. Most recently, the
exchange has lobbied successfully for the
abolition of the withholding tax laws for
debt market instruments and single stock
options, a major hindrance for international
participants in its markets. This was in
marked contrast with other developing
countries, where exchanges have had some
difficulty in persuading the authorities to
remove withholding taxes.
Mexder, in this context, resembles
European derivatives exchanges, which grew
significantly in the 1980s and 1990s with the
firm and often direct backing of their governments.
This European aspect to Mexder's
development is highlighted by its close relationship
with Meff. The Spanish exchange
has a 7.5% shareholding in Mexder, has a
representative on the Mexder board, and
supplies its S/MART electronic trading platform
to Mexder. Since March 2004 various
products have been successfully listed on this
system, starting with individual stock futures
and stock index futures, and more recently
with single stock options and government
Mexder has a broad spectrum of products,
covering futures on the main national
stock index as well as a number of individual
stocks, international currencies and shortterm
interest rates. The exchange also plans
to list a series of single stock options this
year, and is considering the possibility of listing
a natural gas futures contract. However,
trading activity is relatively concentrated.
The star contracts are the short-dated interest
rate contracts, and, in particular, the
TIEE which in November 2005 accounted
for 94.5% of total exchange volume and
98% of open interest. Volume in the IPC
stock index future in the same month was
under 1% of the total and trading in single
stock futures has not been material.
Trading activity in 2005 was well off the
2004 peak of approximately 204 million
contracts, but the exchange still ranks
among the top 20 in the world in terms of
the number of contracts traded. The very
rapid volume growth seen in 2003 and 2004,
largely based on a surge of interest in the
TIEE contract, is giving way to steady and
more diversified interest in Mexican listed
derivatives by both national and international
players. This interest is based on customer
and proprietary hedging needs, rather
than the kind of speculation seen in other
developing markets, such as the Kospi stock
index options in Korea.
The main challenge for Mexder is to
develop longer term interest rate products, in
particular futures based on the M3 and M10
Bonos issued by the government, and the
series of individual stock options which will
come on stream this year following the introduction
of options on América Móvil in
2004. Active trading across the broad spectrum
of products is the key to the sustained
success of this exchange.
| ||Market Makers
Banco del Centro, S.A. GF Banorte
Banco JP Morgan, S.A.
Banco Nacional de México, S.A.
Banco Santander Serfin, S.A.
Banorte Casa de Bolsa, S.A. de C.V.
BBVA Bancomer, S.A.
Deutsche Bank México, S.A.
Finamex Casa de Bolsa, S.A de C.V.
GBM Casa de Bolsa, S.A. de C.V.
HSBC México, S.A.
ING Bank (México), S.A.,
Institución de Banca Multiple
Invex Casa de Bolsa, S.A. de C.V.
Ixe Banco, S.A.
Monex Casa de Bolsa, S.A. de C.V.
Multivalores Casa de Bolsa, S.A. de C.V.
Nacional Financiera, S.N.C.
Scotia Inverlat Casa de Bolsa, S.A. de C.V.
Valores Mexicanos Casa de Bolsa, S.A de C.V
Acciones y Valores Banamex, S.A. de C.V.
Banorte Casa de Bolsa, S.A. de C.V.
Banco Inbursa, S.A.
Banco Nacional de Comercio Exterior, S.N.C.
BBVA Bancomer Derivados
Darka, S.A. de C.V.
DerFin,S.A. de C.V.
GAMAA Derivados, S.A. de C.V.
GBM Casa de Bolsa, S.A. de C.V.
GFD, S.A. de C.V.
Merrill Lynch México S.A. de C.V.
Monex Derivados, S.A. de C.V.
Multivalores Casa de Bolsa, S.A. de C.V.
Operadora de Derivados Serfin, S.A. de C.V.
Scotia Inverlat Derivados, S.A. de C.V.
SERAFI Derivados, S.A. de C.V.
Stock & Price, S.A. de C.V.
Valores Mexicanos Casa de Bolsa,
S.A. de C.V.
Vector Casa de Bolsa S.A. de C.V.
The structure of the clearinghouse is an
important additional strength of the
exchange. Asigna performs the standard
duties expected of a clearinghouse: acting as
counterparty to all trades on the exchange,
margining, clearing and settlement of contracts,
risk management, and custody of the
clearing and members' contribution funds. Where Asigna stands out is in its exceptionally
strong financial backing, which ensures
the financial stability of the clearing and settlement
The clearinghouse was incorporated in
1998 as an administration and payment trust
within BBVA Bancomer, one of the country's
leading banks, and it is backed by a
group of trust banks consisting of Citibank
Banamex, Scotiabank Inverlat, Santander
Serfin, and S.D. Indeval, the Securities
Deposit Institute, as well as BBVA
Bancomer. With the exception of S.D.
Indeval, all of these banks are members of
non-Mexican banking groups (one U.S., one
Canadian, and two Spanish) with capital
measures that meet the highest international
standards. This construct, unique in listed
derivatives markets in Latin America or in
the rest of the developing world, is made possible
by the relative clarity of Mexican property
laws relating to clearing and settlement.
The participation of global foreign banking
groups as trust banks in the clearing and settlement
structure highlights the international
nature of the exchange and its
adherence to global standards.
In 2005, Mexder confronted a number
of issues that over time will significantly
support growth on the exchange and make
it more attractive to both national and
international players. On the domestic
front, the most significant event was the liberalization
of the investment rules for
Mexican pension funds, known locally as
Administradoras de Fondos de Retiro.
These are now permitted to invest up to
15% of their assets in equities, and in listed
derivatives as part of their hedging strategies.
Prior to this reform, their investments
were primarily in Mexican government and
corporate debt. The expected result of this
reform is that these funds, as they become
more familiar with equity investments and
hedging strategies, will drive a very substantial
increase in the trading of IPC index
futures and the series of single stock options
coming on stream this year.
On the international front, investment
in fixed income futures and single stock
options was hampered by withholding tax
rules which, depending on the country of the
legal entity trading, could be as high as 35%.
This became a serious impediment to
Mexder's growth in 2004, when a number of
international players took an interest in
Mexico's swap market and entered the business
as counterparties to local institutions.
As a result, significant amounts of trading in
Mexder's TIEE contracts, which are often
packaged together and traded as strips known
as "engrapados", moved to the over-thecounter
market to avoid withholding tax.
This contributed to material declines in volume
on the Mexder exchange from Summer
The withholding tax rules were eventually
abolished with respect to fixed income
futures in October 2005 under a temporary
enabling measure, then incorporated permanently
into the tax law in December. Mexder
officials expect a similar measure in the near
future to abolish withholding taxes on single
stock options. This successful negotiation
with the Mexican tax office, the finance
ministry and the central bank demonstrates
the recognition by the exchange of concrete
legislative obstacles to its growth, and its
willingness to take issue with them. This is in
marked contrast to other markets in Latin
America, in particular Brazil, where tax rules
and legal procedures (e.g. the consularization
of documents) continue to hamper the
development of international business.
The second significant development for
international participants has been the
authorization in October 2005 of remote
trading. As mentioned above, it is now possible
to be a trading member of the exchange
without necessarily being resident in
Mexico. Remote trading membership will
allow global firms to concentrate their trading
in legal entities already established for
listed derivatives quoted on other exchanges.
This avoids the one legal entity per national
market syndrome that has bedevilled futures
and options elsewhere in the developing
world. Remote clearing membership is still
not yet possible, but discussions on this further
stage are already underway and will
depend ultimately on regulatory and central
bank approval. Remote clearing membership
would be a significant further aid to Mexder,
as participation by global firms in a national
market depends, in general, on perception of
the minimal necessary critical mass, this
being substantially reduced if the legal entity
and its employees are already in place.
Moving to FIX
Two other processes are underway which
will facilitate trading by international institutions
on the Mexder exchange: the application
of the FIX API and the development
of Peso funding for the margin of foreign
players. Mexder is totally electronic, but
access depends on trading systems provided
by clearing members, and these systems in
general have not kept pace with the technological
advances developed by international
software vendors. The local trading systems
are, moreover, stand-alone, hampering the
ability of global firms to integrate Mexder
into the spectrum of services they provide.
The application of FIX, currently in its final
stage of testing, should change this.
International ISVs will be able to use FIX to
build the appropriate gateways and interfaces
and add Mexder to the list of exchanges on
offer. In this way, the use of FIX facilitates
the development of remote trading memberships,
essential for the broadening of the
The second process that started in 2005
was the introduction of short-term Peso margin
funding facilities for international
clients. Mexder sets tight margin deadlines,
and international clients relying on ad hoc
FX transactions often fail to meet the
required funding times. The major clearing
banks, in particular the trust banks, are now
starting to offer short-term funding packages
at reasonable interest rates which greatly
facilitate day-to-day processing of Mexder
trades transacted by international players.
In summary, Mexder is in the process of
building a listed derivatives market which
sets an example for developing markets with
its infrastructure, trading and clearing systems,
regulatory environment, and willingness
to do battle with the issues which
normally hinder business in the developing
world: tax, technology, and bureaucracy. Its
task ahead is to create substantial interest in
products other than the TIEE and to create
an expanded international trading and clearing
membership. The signs for this expansion
are highly promising: If the Mexican economy
continues to grow, Mexder has every
chance of gaining the lion's share of the
hedging transactions of financial investors,
both established and new.
John Mathias is a director of Merrill Lynch and chairman of the FIA U.K. Chapter. He is a member of the Futures Industry editorial advisory board.