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Structure and Risk

I n g e n e r a l , e x c h a n g e - l i s t e d d e r i v a t i v e s m a r k e t s h a v e f o u r c o m p o n e n t s : t h e e x c h a n g e i t s e l f , t h e c l e a r i n g h o u s the clearinghouse’s clearing members, and the exchange traders. according to specific legal restrictions and climates for each jurisdiction e , This structure may vary, however, .

Generally the exchanges and clearinghouses are incorporated as limited-liability stock corporations , (sociedades anónimas). Clearinghouses may be operating divisions of the exchanges themselves,

subsidiaries, or independent legal entities. The members or owners of the exchanges and clearinghouses may be equity or trading members; the latter can specialize in a variety of categories. Both must meet statutory requirements and other requisites in terms of registry, ethics, and capital, among others.

The owners of the exchange are its own members, and these may be financial brokers, companies, or individuals, since sometimes exchanges are considered public domain. The owners of clearinghouses are usually partners or members of one or more exchanges, and they can also be brokers, corporations, or individuals.

In Mexico, to manage risk, participating institutions must obtain authorization from the financial authorities and the derivatives exchange (MexDer), as a self-regulatory agency, to begin trading. They must meet capital requirements, have robust risk management systems, and commit to the technical and ethical training of its executives; they must have appropriate systems for trading and for the transfer and handling of margins, a safety net for trading, and procedures to cover situations of client default.

Futures prices can fluctuate substantially. Since the participant deposits only the initial margin (plus a variation margin), which is a percentage of the value of the position, a futures contract is a highly leveraged transactions, and participants can lose up to all of their original margin, and may be required to deposit additional margin, which may even be greater than the initial margin.

Fluctuations in future prices can be caused not only by changes in the price of the underlying but also by exchange-rate fluctuations, excess supply or demand, or other reasons.

Any client who wishes to participate in the futures market should be aware of the risks that it entails, and should understand the mechanics of futures trading.

The Case of Mexico

There are already a wide variety of instruments available in Mexico to distribute risk: forward contacts, options, and swaps traded over the counter on a number of underlying assets, through brokers authorized by Banco de Mexico; warrants on indices, stocks, and baskets of stocks listed in the National Registry of Securities and Intermediaries, and issued by companies that meet requirements established by the national Banking and Securities Commission (CNBV) and traded by brokers on the Mexican Stock Exchange (BMV). In Chicago, Mexican brokers authorized by Banco de Mexico trade futures and options on the peso, the Mexican Stock Exchange’s IPC Index, Federal Treasury Certificates (CETEs), the Interbank Equilibrium Interest Rate (TIIE) and Brady Bonds.

In contrast to over-the-counter markets, derivatives exchanges reduce and standardize credit risk through the existence of a clearinghouse, and make price formation more efficient because some of these enjoy greater liquidity and release available information on a continuous basis. MexDer may be more attractive than the foreign exchanges where Mexican underlying assets are listed because it can reduce the transaction cost of trading in local currencies. In addition, the size of the contracts was designed according to the size of the industry, physical delivery of non-financial underlying assets is permitted, and the market contributes to the growth of parallel industries.

Market supervision and oversight is based on a self-regulatory scheme (see figure 3). scheme, the exchange supervises and monitors trading activity on the trading floor and in The clearinghouse supervises and monitors its clearing members; clearing members

According to this the clearinghouse. supervise trading

members; and finally, clearinghouse, though it

the may

CNBV regulates, supervises and also exercise oversight in the rest of

monitors primarily the the market, if necessary.





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