INTERVIEW: Mexican Exchange Preps For Derivatives Market Revamp

Mexico's main exchange operator is developing a new clearinghouse and trading platform that will service the country's swaps market, aimed to get a jump on planned regulations, according to the company's chief executive.

The market revamp, seen modeled on the U.S. Dodd-Frank financial law, opens up a new swath of Mexico's derivatives market for the Bolsa Mexicana De Valores (BOLSA.MX) and could deepen the firm's ties with Chicago-based exchange company CME Group Inc. (CME).

"It's clearly in the exchange's interest to be able to participate fully in the new institutional framework that is going to be built up," said Luis Tellez, president of Mexico City-based BMV, in an interview.

"We are preparing ourselves and already have done much of the electronics [work] that need to be done in terms of the clearinghouse," he said.

The U.S. is pressing ahead with rules called for by the Dodd-Frank act, which more tightly regulates trade in products like credit derivatives and interest-rate swaps. Such derivatives contracts, traded off-exchange in a market dominated by dealer banks, caught blame for worsening the credit crisis in 2008 because the market proved difficult for regulators to monitor for big risks.

Europe simultaneously is developing its own rules set, and Mexico aims to follow suit, alongside other nations like Japan, Singapore, Korea and South Africa.

Exchanges stand to capture new business by applying their methods for trading futures and stock-options to more complex instruments like swaps and forwards.

BMV is developing a separate clearinghouse to handle the business, Tellez said, which will house collateral posted against outstanding trades in over-the-counter derivatives. The firm is using a risk-management system developed by Algorithmics Inc. and may leverage its relationship with CME, which owns a 1.9% stake in BMV and has teamed with the Mexican exchange group to broaden access to both companies' futures markets.

"There is the possibility of a joint venture on the clearinghouse, but we haven't decided," Tellez said.

The size of Mexico's market in over-the-counter derivatives runs about three times larger than the share- and futures trading now done at BMV, Tellez said. Interest-rate swaps, used by banks and municipalities to hedge mortgage exposure and bond issues, make up about 60% of the instruments traded, according to a report by the Financial Stability Board.

Tellez said that BMV is in talks with Mexico's securities market regulator and central bank as authorities form up new guidelines for the products.

"I believe something will come out on it very soon," he said, and next summer's meeting of the G20 nations in Mexico looms as a key date to show progress. The world's top 20 economies agreed two years ago to direct off-exchange derivatives transactions toward clearinghouses, which guarantee trades, and strengthen reporting practices.

If BMV can capture half of the revenue to be generated by clearing trades in over-the-counter derivatives and one-quarter of the fees that will come from executing transactions, the firm stands to make an additional 1.1 billion pesos ($80.4 million) in revenue, according to analysis by Equity Research Desk.

Some of that business may come as U.S. authorities complete Dodd-Frank rulemaking, and derivatives dealer banks decide it's cheaper to shift some of their Mexico-related swaps business to Mexico City from New York, said Bernardo Mariano, analyst with Equity Research Desk.

"It could be an opportunity to repatriate some of that business," he said.

-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com

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