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DERECHO & ECONOMÍA
DERIVATIVES AND RISK MANAGEMENT IN MEXICO
FINANCIAL INNOVATION: GROWTH AND NEW
PRODUCTS
Dr. HERNÁN SABAU
MAY 2001
Innovations in different markets
DERECHO & ECONOMÍA
• Fixed income securities
• Interest rate
• Foreign exchange
• Currencies
• Equity
• Indices and individual stocks
• Credit
• Default risk
The Mexican Derivatives Market: past
innovations in different markets
DERECHO & ECONOMÍA
• Fixed income
• Petrobonos (1977)
• OTC Senior / Junior structures (1993)
• FX
• Coberturas cambiarias (1987)
• Equity
• Warrants market (1992)
• IPC, guaranteed returns, american call spreads
• OTC issues
• Nafta warrant (1993)
• MexDer
• Futures on individual stocks (1999)
• Credit (?)
DERECHO & ECONOMÍA
The Mexican Derivatives Market
has not grown to a mature market
• Trading Volume has grown very slowly
• Underlying markets: depth and liquidity
• 1994 / 1995 crisis: effects on credit and the
financial system
• Regulatory issues
• Excess controls through early and mid 90’s
• Capital requirements after crisis
• Risk management
• Tax implications
• Risk culture
DERECHO & ECONOMÍA
The Mexican Derivatives Market:
recent developments favoring innovation
in the Fixed income and FX markets
• Up to 1999 longest rate was for 91 days
• Development of a long term interest curve:
• Decreasing inflation and stability
• Bank disintermediation: increasing market
share of Government debt
• Introduction of M2 – M5 bonds: fixed income
2-5 year bonds with fixed rate
• Institutional investors: Afores, Life Annuities,
Insurance Companies
DERECHO & ECONOMÍA
Recent developments favoring derivatives
innovation: bank disintermediation
Market Share
Annual Real Growth
50%
120%
45%
100%
40%
80%
35%
30%
60%
25%
40%
20%
20%
15%
0%
10%
-20%
5%
-40%
0%
98 A
J
O 99 A
J
O 00 A
J
O
98 A
J O 99 A
J O 00 A
J O
Checking accounts + current deposits
Checking accounts + current deposits
Rest of bank securities deposits
Rest of bank securities deposits
Government securities-held by residents
Private securities- held by residents
Government securities- held by residents
Private securities- held by residents
DERECHO & ECONOMÍA
Recent developments favoring derivatives
innovation: Government debt with fixed
rates and 2 to 5 years maturity
Government Securities Structure
(Thousand dollars)
DERECHO & ECONOMÍA
Recent developments favoring derivatives
innovation: Institutional Investors
Siefores
All figures in million dollars
Mutual Funds
Insurance Companies and
Life Annuities (Reserves)
DERECHO & ECONOMÍA
Recent developments favoring derivatives
innovation: 5 year interest rate curve
DERECHO & ECONOMÍA
Recent developments favoring derivatives
innovation: 5 year interest rate curve
DERECHO & ECONOMÍA
The Mexican Derivatives Market:
recent developments favoring innovation
in the Fixed income and FX markets
• Development of more depth and liquid markets
• Deregulation:
• easier access to markets
• Capital requirements and risk control
• Market makers
• Since october 2000, 5 institutions
• Only Fixed rate Government securities
• More competitive picture in equity trading
• Opening of listed futures market and clearing
corporation
DERECHO & ECONOMÍA
Recent developments favoring derivatives
innovation: more liquidity
Liquidity
(Daily turn over/outstanding)
Fixed Rate Securities
Floating Rate Securities
Inflation Link Securities
IPAB Securities
Central Bank
CETES
17.77%
BONO M3
139.55%
BONO M5
2.03%
BONDE 28
0.42%
BONDE 91
0.56%
BONDES 182
0.95%
BONDES T
0.000%
UDIBONOS 3
0.002%
UDIBONOS 5
0.003%
UDIBONOS 10
0.000%
IPAB
0.002%
BREMS
0.002%
DERECHO & ECONOMÍA
Recent developments favoring derivatives
innovation: more competitive equity market
Accival
Vafin
3%
10%
Merril Lynch
9%
Vector
9%
Bancomer
4%
Goldman Sachs
5%
Santander
9%
Inverlat
7%
GBM
8%
Probursa
7%
Otras
16%
Inbursa
6%
Banorte
7%
Scene for derivative innovations which
are on the way in different markets
DERECHO & ECONOMÍA
• Fixed income securities
• Interest rate swaps (28d vs up to 5 yrs)
• Caps and floors
• Foreign exchange
• Currency swaps
• Options, futures and forwards
• Equity (?)
• Credit (?)
• Asigna: absortion of counterparty risk
• Problem:
• mostly interbank, lack of corporate risk policy