Demand for derivatives grows in 2023 due to volatility: MexDer

The demand for derivatives, financial instruments that serve to hedge against volatility in the markets, has grown so far in 2023, with the future of the dollar-peso as the “star” product, said José Miguel de Dios, general director of the Mexican Derivatives Market (MexDer).

There are different kinds of derivatives: to hedge against volatility in the exchange rate, in interest rates, in stock indices and shares, as well as in commodities and cryptocurrencies.

José Miguel de Dios explained that this year the most traded derivative in the MexDer is the future of the dollar, which is used by companies, banks or any other investor to hedge against increases in the exchange rate.

“Dollar futures is the star contract, it is the one that was traded the most last year and this year it is also the one that has been traded the most,” said the director of the Mexican Stock Exchange in an interview.

He explained that with the volatility that has occurred in recent months in the exchange rate, “there is a great need for coverage. It is an important moment to cover risks and investors are taking advantage of it”.

So far in 2023, the peso-dollar exchange rate has operated in an open range between 17.8975 and 19.2922 units. This Monday, April 17, it closed at 18.0282 pesos per dollar.

In addition to exchange rate hedges, there are other derivatives. The manager said that the second most traded in 2023 are the 28-day TIIE swaps, the benchmark interest rate in the financial market.

“What can you do with those kinds of instruments? For example, if I think rates are going to rise, I do a swap in which I pay you a fixed rate and you pay me a floating rate. During the 13 coupons (in the 13 for 1 contract), I pay interest at a fixed rate, and you are going to pay me the interest of the rate that comes out (variable) ”, he explained.

The director of MexDer revealed that the average amount of 28-day TIIE swaps grew 48% in the first quarter of 2023, amounting to 2.2 billion pesos.

José Miguel de Dios assured that historically, TIIE swaps are the most traded derivative product in Mexico, counting not only MexDer operations but also those of the Over The Counter (OTC) market.

He added that the third most relevant product in the MexDer is the future of the BMV’s Price and Quotation Index (S&P/BMV IPC), which this year has been more traded thanks to the positive performance of the local stock market.

The daily average amount of S&P/BMV IPC futures amounted to 850 million pesos between January and March 2023, an increase of 17.4% compared to the same period in 2022.

bitcoin futures

MexDer would like to launch a cryptocurrency future, “but we are not pushing it because Banxico has been very vocal, very clear that they do not like these types of assets,” said José Miguel de Dios.

“At some point we were analyzing making a derivative of cryptocurrencies, but the Bank of Mexico said that the operation of cryptocurrencies is not regularized, that it is not allowed, that it does not like that it be operated, so we should give up and stay on the sidelines,” explained.

José Miguel de Dios revealed that MexDer has already approached the authorities to discuss the project with them, but they told him that they did not like it. “If Banxico doesn’t like it, they won’t authorize it for us,” he said.

Regarding the project that MexDer had to launch an electricity future in the country, the manager assured that it had to be stopped mainly due to the electrical counter-reform of President Andrés Manuel López Obrador.

“We were very advanced (…) we had talked with authorities, with end customers, with generators and energy suppliers and it all made a lot of sense to them,” said José Miguel de Dios.

He explained that the future contract would be linked to the reference price disclosed by the National Energy Control Commission (Cenace), and that the project had been in progress since 2018.

“But then came the issue of the energy counter-reform and then that made us stop because we don’t know what will happen,” said the manager.

“I can buy an electricity future with the current conditions, but if there is a reform with which the price is going to be calculated differently, what I buy or sell is the same and it will no longer serve as coverage” , said.

Lag behind other countries

Despite the growth that the Mexican Derivatives Market has had in the last two years, it is still very small for the size of the Mexican economy and lags far behind the markets of other countries such as the United States and Brazil, acknowledged during the interview his director, José Miguel de Dios.

During the past year, said the stock market director, the MexDer registered a volume of operations of approximately 7.1 million contracts, according to data from the Mexican Stock Exchange itself.

In the same year, the Brazilian derivatives market had operations for 8,313 million contracts.

Similarly, the Chicago Futures Market (CME) in the United States had a volume of 5.846 million contracts in 2022.

The CME is just one of the more than 27 derivatives markets that exist today in the US market, so the volume of operations in the neighboring country to the north is much larger.

sebastian.diaz@eleconomista.mx