Mexican Derivatives Exchange

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The Mexican Derivatives Exchange (MexDer),offers Futures and Options Contracts, being instruments that allow to fix today the price of purchase or sale of financial assets (US Dollar, Euros, bonds, individual stock, indices, interest rates) to be paid or delivered in a future date. This gives the possibility of planning, hedging and managing financial risks, as well as to optimize the performance of portfolios. The Mexican Derivatives Market is characterized by being, in its sort, one of the most dynamic on the world.

Contents 1 History 2 Organization 3 Financial Derivatives 4 Electronic Trading 5 See Also 6 Source

[edit] History

The startup of the Mexican Derivatives Market marks a milestone in the development and internationalization of the Mexican financial system. The project´s development was possible thanks to the continuous efforts of multi-disciplinary teams that included professionals from the Mexican Stock Exchange, the Mexican Securities Industry Association (AMIB) and S.D. Indeval.

These teams developed the operating, legal and systems infrastructure necessary to meet the legal, operating, technological and prudential requirements established jointly by the Ministry of Finance and Public Credit (SHCP), the National Banking and Securities Commission (CNBV), and the Central Bank (Banco de Mexico), the financial authorities of Mexico.

The importance of an organized market for exchange-listed derivatives in countries like Mexico has been discussed by international financial organizations like the International Monetary Fund (IMF) and the International Finance Corporation (IFC). These institutions recommend the creation of markets for exchange-listed derivatives in order to promote macroeconomic stability and to facilitate risk control for financial intermediaries and economic entities.

The challenge we have faced is creating this type of market in a country that has already faced numerous financial crises and that has been significantly affected by fluctuations in the international markets. This required the Mexican financial authorities to strengthen the regulatory and prudential framework applicable to the markets, as well as payment systems, intermediaries, and participants.

The process of structural change in Mexicohas also given rise to the need for special requirements in addition to the international recommendations by the Group of 30 (G-30), the International Organization of Securities Commissions (IOSCO), the International Federation of Stock Exchanges(today the World Federation of Exchanges, or WFE), and the Futures Industry Association (FIA), among others.

The efforts to create an exchange-listed derivatives market in Mexicobegan in 1994 when the Mexican Stock Exchange and S.D. Indeval jointly took on the commitment to create such a market. The Stock Exchange financed the project to create a futures and options market called MexDer, Mercado Mexicano de Derivados, S.A. de C.V., meanwhile Indeval assumed the responsibility of financing the development of a derivatives clearinghouse called Asigna, Compensación y Liquidación, from 1994 until the date both these companies were formally incorporated.

[edit] Organization

Shareholders' Assembly

This is the highest body of the company, and its legally-adopted resolutions are binding on all its shareholders.

Board of Directors

The body in charge of the administration of MexDer, made up of regular members and their respective alternates.

Committees

The Board of Directors is supported by various committees for addressing and resolving matters of specific nature described in the prudential rules and provisions issued by the financial authorities, as well as in MexDer´s bylaws chart and internal regulations. These Committees are:

• Executive Committee.

• Admission and New Products Committee.

• Compliance and Ethics Committee.

• Auditing Committee.

• Discipline and Arbitration Committee.

• Certification Committee.

• Clearinghouse Committee.

• Promotion Committee.

Market Participants

Participants in MexDer may be brokers or clearing members.

Brokers

Brokers are corporations authorized to trade Contracts in MexDer´s Electronic Trading Systems, acting as brokers for one or more Clearing Members.

Clearing Members

Clearing Members are trusts that participate as shareholders of MexDer and contribute to Asigna´s capital; their purpose is to settle and, when applicable, trade Futures and Options contracts in MexDer on behalf of clients. For this purpose, they must be able to meet the financial, credit and operating requirements established in the regulations applicable to the derivatives market. Clearing Members have their own capital, they specialize in the evaluation of counterpart risk, manage guarantees and, in order to avoid conflicts of interest, they keep proprietary accounts completely separate from third-party accounts.

Market Makers

Financial Institutions that have been approved by MexDer to act as such, and which must, on an on going basis and for their own accounts, maintain bid and ask quotes for Futures and Options contracts, regarding the Class for which they are registered, in order to promote their trading.

Certification of Personnel

To guarantee that the personnel of its members have the necessary technical knowledge in the field of derivative products, as well as training in the Professional Code of Ethics of the Mexican Securities Community, MexDer has delegated the responsibility of applying certification exams to the Mexican Securities Industry Association (AMIB). These exams are held in accordance with the guidelines established in MexDer´s Internal Regulations and Manual of Policies and Procedures.

[edit] Financial Derivatives

Derivatives

Derivative products are a family or set of financial instruments whose primary characteristic is that they are linked to an underlying or reference value or asset. Derivative products emerged first as instruments for hedging against fluctuations in the price of agro-industrial products (commodities) under conditions of extreme volatility.

Financial derivatives

Beginning in 1972, the family of derivatives instruments began to expand briskly, to include a new set of reference assets such as securities representing equity or fixed income, indices, interest rates, currencies and other financial instruments. The most common financial derivatives are futures, options, and swaps.

Futures

These are instruments that allow us to fix the purchase and/or sale price of a product (for example, a currency, a stock, etc.) today, for payment and delivery on a future date. Because they are standardized in terms of the size of the contract, the maturity date, form of settlement and negotiation, they can be listed on a derivatives exchange.

Options

A standardized contract in which the option buyer pays a premium and acquires the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a specific price on a specified future date. The option seller is obliged to perform the opposite action of the contract if the buyer exercises this right.

Swaps

Derivative instruments that allow for the exchange of periodic interest payments (for example fixed-rate for variable-rate) or positions in various maturities and/or currencies.

Underlying Assets

The most commonly used underlying assets for financial derivative contracts are interest rates, stock indices, individual stocks, and foreign currencies.

Advantages of financial derivatives

The main purpose of derivatives is to serve as a hedge against fluctuations in the price of the underlying asset. For this reason, they are applied preferably to:

• Stock portfolios.

• Obligations taken on at an adjustable rate of interest.

• Payments or collections in foreign currency at a specified term.

• Cash flow planning; and others.

Derivative products are instruments that contribute to the liquidity, stability and depth of the financial markets, and to generate conditions for diversifying investment and managing risk.

Some of their uses are:

Currency contracts

• If you have future payments or collections in foreign currencies.

• If you acquire equipment payable in other currency.

• If you are importing or exporting different goods.

Interest rate contracts

• If you want to hedge against an increase or decrease in interest rates.

• If you take out a loan at a floating rate, and you wish to fix the interest rate.

• If you want to ensure a specific return on an investment.

Contracts on stock indices or individual stocks

• If you want to hedge against potential losses in stock portfolios.

• If you want to perform an advanced purchase of stocks when you have no cash flow today.

• If you want to profit when the market declines, and simulate short sales.

[edit] Electronic Trading

SENTRA®-DERIVADOS Trading.

On September the 30th 1999, the Board of Directors of MexDer approved the project to create an electronic trading system. The decision was oriented to reduce the operation costs, to facilitate the activities of monitoring of the market, to cause the transparency in the process of prices making, to guarantee the fairness in the contract celebration, to fortify the mechanisms of operative security and fundamentally to create the technological conditions for the later development of the Market.

The Electronic Trading, Transaction, Registry and Allocation System (SENTRA®-DERIVADOS) it is a mechanism that replaced the open outcry market, by another remote one, totally automated and on real time. Through SENTRA®-DERIVADOS it is possible to register sale positions and buys, to conduct cross transactions, self entry transactions and transactions at settlement price , as well as, to make the monitoring of the positions introduced to the system, to determine the proportions the depth of the market and to identify self entry transactions and cross transactions.

Also, the SENTRA®-DERIVADOS allows to obtain on line data and to transmit it on the same way towards the Automated Securities Integral System (SIVA) from where it is spread towards all the financial system.

SENTRA®-DERIVADOS was developed under the architecture client/server. The central server of the system is TANDEM equipment, with architecture to support applications of critical and tolerant to failure missions. The central server connects to the workstations by the communication protocol TCP/IP, simultaneously that maintains interfaces in real time with the other applications of calculation and dissemination of data of the MexDer and other institutions of the exchange market.

Benefits of SENTRA®-DERIVADOS.'

• Less Cost.

Eliminates the communication costs to the Trading Floor. Reduces the personnel for the administration of the trading.

• Electronic orders book.

Total Vision of the Book Bids or Offers are registered in hundredth of second. Reduction of the difference of prices between purchase and sale.

• Market transparency.

Efficiency in price making. Increase of the confidence of the public.

• On line answer.

On line execution and allocation. It avoids technical misfortunes of the open outcry market.

Consultations of SENTRA®-DERIVADOS. All the functions of SENTRA®-DERIVADOS are made in a single window, divided in the 11 following sections:

• Class Consultation
• Portfolio of Operation
• Statistical
• Controls of consultation
• Market Sales side, Purchases and Facts
• Active Cross Transactions
• Active Consultations
• Available Portfolios
• Multiple Order Entry
• Message area
• Ticker
• General System Message area

Participants. For the trading of contracts through SENTRA®-DERIVADOS all Clearing Members and Traders who had receive an authorization to trade from the Board of Directors participate. In order to guarantee the rigorous use of the negotiation system, each user has an electronic confidential signature, which consists of a user number and an individual access code, which must be modified periodically by the user.

Functionalities of the System. The functions approved by the Committee of Admission and New Products are the following ones:

• Trading Hours
• Access codes
• Bid or Offer Entry
• Modification and retirement of orders
• Cross Transactions
• Self-Entry
• Confirmation of transactions
• Auctions
• Trading in account of other Intermediary (give up)
• Calculation of settlement prices
• Trading at settlement prices
• Communication with the systems involved

S/MART®

The joint venture with the Spanish Market of Futures and Financial Options MEFF on June the 2nd 2003, with the intention of developing an Options market in Mexico, contemplated the use of the S/MART (System for Markets Automatic Real Time) electronic system that MEFF uses for the negotiation, clearing and settlement of its markets. In MexDer, since March 22nd 2004 it is used for the trading of Options, as well as for the negotiation of futures whose underlying asset is an instrument of the capital market; continuing in charge of Asigna, the functions relative to clear and settle in his own systems.

In this way the trading of futures has been moved from SENTRA Derivados® to S/MART on the Price and Quotation Index (IPC) of the Mexican Stock Exchange, as well as the individual stock futures contracts listed at MexDer.

S/MART main characteristics are the following:

• Automatic negotiation by connected intelligent terminals with the central servers.

• Existence of mechanisms of reconnection in case of failure of the communications lines, allowing alternate routes of communication.

[edit] See Also

• Bolsa Mexicana de Valores

• Economy of Mexico

• Peso

• List of futures exchanges

[edit] Source

Mercado Mexicaco De Derivados Official Site