Wednesday, December 9, 2009

Mexico planning new year swaps push

Originally posted in the Financial Times by Adam Thomson:

The Mexican Derivatives Exchange plans to offer from January exchange-traded and cleared interest-rate swaps in a push to muscle in on a market with an estimated value of $500m a day.

The decision to offer the new instrument comes as regulatory authorities in the US and Europe are scrutinising the over-the-counter (OTC) markets with a view to reducing risk by ensuring that more of these transactions are processed through clearing houses and are pushed on to formal exchanges.

In an interview with the Financial Times, Jorge Alegría, chief executive officer of MexDer, as the exchange is known, said that the idea was to offer investors the chance to buy and sell two- and 10-year Mexican interest-rate swaps in an organised and transparent environment. At present, investors trade the swaps in the OTC market in which they trade directly with each other, taking on significant counterparty risk in the process.

Mr Alegría said that by using MexDer's clearing house, investors could "virtually eliminate counterparty risk", as well as reduce transaction costs.

"In the OTC market, you take on my risk and I take on yours, which is a potential problem," said Mr Alegría. "But in the exchange, the clearing house absorbs all the risk from all the parties. It is very efficient."

MexDer is a subsidiary of the Mexican Stock Exchange (BMV), which launched an initial public offering last June.

Mr Alegría said that he expected MexDer to be able to capture 20 per cent of the OTC market in interest-rate swaps following the launch of the new instrument in the new year.

An additional advantage, explained Mr Alegria, is that there is no type of withholding tax for transactions carried out through the exchange, which is not always the case in the OTC market.

The decision to launch the new instrument comes just a few weeks after regulatory authorities in Mexico changed rules to allow local pension funds, known as Afores, to invest in individual stocks and stock options for the first time.

According to Mr Alegría, the funds, which have an estimated $85bn under management, roughly equivalent to 10 per cent of the country's gross domestic product, will now be able to invest up to 9 per cent of assets under management in so-called structured instruments.

These include individual stocks and a new product called certificates of capital and development or CKDs, which are designed to raise funds for specific infrastructure projects as well as for private equity investment.

In a recent interview with the FT, Luis Téllez, the Mexican Stock Exchange's new president, called the change in the regulations "very significant".

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