Methodology Note for Turnover Statistics of Derivatives traded by Domestic Brokerage Houses, Commercial and Development Banks

Transcription

1 Methodology Note for Turnover Statistics of Derivatives traded by Domestic Brokerage Houses, Commercial and Development Banks 1. Introduction Financial transactions known as derivatives allow participants to manage in a better way the risks they face. Derivatives markets complement spot markets and improve liquidity and financial depth on those markets. Derivatives transactions can be classified according to the market they are traded: a) organized (derivatives exchanges) and b) Over the Counter (OTC) markets. In organized markets, derivative contract terms are standardized and settled through clearinghouses. Meanwhile, the OTC derivative markets provide greater flexibility for participants to establish contract characteristics, in spite of being settled bilaterally. Given that for a large number of agents there are common risks in trading derivatives, significant efforts have been made around the world in order to mitigate such risks, among them is to have information of each derivative transaction negotiated in exchanges and OTC markets, as well as improving the coverage and quality of the information available in each jurisdiction. Consistent with the above and with aim of contributing to the analysis and transparency on those markets, Banco de México made available data series (statistics) with daily frequency on the turnover of derivative transactions traded by domestic (commercial and development) banks and brokerage houses authorized to operate in Mexico. 1

2 All data series were made with information on derivatives transactions provided directly to Banco de México by those financial institutions, in compliance with paragraph 12.1 of its Circular 4/2012 ("Rules to execute derivative transactions"). Thus, that information corresponds to derivative transactions traded by those institutions on their own in both derivative exchange and OTC markets (in Mexico and abroad). It is noteworthy that data series are only published as reference material and for analysis, and they do not pretend to be used as an official data or for legal purposes, thus Banco de México is not responsible for its use. 2. Classification criteria The main objective for publishing these data series is to provide a complete and consistent overview of size and structure of derivatives turnover traded by domestic banks and brokerage houses, improving transparency of those markets and increasing the availability of information for monetary and financial authorities, as well as for market participants. Derivatives turnover information is classified according to the following criteria: a) By type of instrument or contract: i) Swaps, ii) Futures, iii) Forwards and iv) Options and Warrants); and type of financial institution (commercial and development banks or brokerage houses). b) By type of market (organized and OTC). c) By type of underlying asset: i) TIIE (Interbank Equilibrium Interest Rate), ii) Other interest rates (different from TIIE), iii) Equities and equity indexes, iv) US dollar and v) Others. 2

3 d) By type and residence of the counterparty transactions (financial and non-financial entities, main countries and regions of residence). e) By original term of transactions (at trading date): i) Up to 3 months, ii) More than 3 and up to 6 months, iii) More than 6 months and up to 1 year, iv) More than 1 and up to 2 years, v) More than 2 and up to 3 years, vi) More than 3 and up to 5 years, and vii) More than 5 years. 3. Methodological aspects According to the international convention used by the Bank for International Settlements (BIS), double-counting is avoided in OTC derivative transactions by deducting half of the notional amount reported to Banco de México when both parties are domestic banks or brokerage houses. Also, for derivative transactions negotiated in the Mexican Derivatives Exchange (also known as MexDer ), it is included only half of the corresponding notional amount, since the main participants in this market are precisely domestic banks and brokerage houses. Furthermore, for swap transactions with variable notional amount, the figure considered is the transaction s notional amount at the time of trading. Meanwhile, for "exotic" option transactions with several exercise dates (for instance, Caps and Floors ), the figure considered is the transaction s notional amount applicable to the first exercise date of the corresponding transaction (in other words, the first "Caplet" or Floorlet ). In the case of transactions known as "swaptions", i.e. options whose underlying is a "swap", the applicable nominal amount of the underlying swap" is considered within the concepts of "options on swaps (exotic options)". 3

4 As described in the preceding paragraphs, the data series on turnover derivatives result from adding the "base or notional amount" of each transaction at trading date, according to the classification criteria referred in number 2. above. 4. Glossary For the information showed in data series, the following definitions 1 are considered: 4.1 Future: contract to exchange an underlying asset at a future date and at a specified price. This contract is traded in derivative exchange markets, their terms and conditions (maturity contract, amount, type of underlying, liquidation form, etc.) are standardized. The main differences between a future contract and a forward agreement are: i) a future contract has secondary market and ii) daily valuation and settlement of future contract through a clearinghouse, where the buyer (or seller) receives or pays every day, the change in the net value of the future, according to the closing price for the future. 4.2 Forward: contract to exchange an underlying asset at a future date and at a specified price. This contract is traded directly between the buyer and the seller (in the OTC), and its terms and conditions are not standardized (maturity, amount for each contract, type of underlying, settlement form, etc.). 1 These definitions are provided with the purpose of enhancing the user s understanding of data series on turnover derivative statistics. Thus, the definitions do not state or suggest the views of Banco de México concerning the legal significance or meaning of any word or term and no definition is intended to state or suggest the Banco de México s views concerning any trading strategy, market practice, or economic theory. 4

5 4.3 Swaps: contract in which two parties agree to exchange payment streams based on a specified notional amount for a specified period. The most common types of contract are: a) Interest Rate Swaps (IRS), where the exchanged flows are calculated with two interest rates on a specified notional amount, b) Cross Currency Swaps (CCS), where the exchanged flows are calculated with two interest rates on two notional amounts denominated in two different currencies. Most of the swaps contracts are traded directly between two parties (in OTC), with terms and conditions not standardized (maturity, notional amount, underlying, term of each flow, etc.). In México a modest part of swap contracts are traded on derivative exchange markets (Interest Rate Swaps on 28 day TIIE in the MexDer). 4.4 Options: contract in which the buyer (or the purchaser of an option) has the right, but not the obligation, to buy, sell or receive a specific amount (or an underlying asset) at a future date and certain price (exercise price); and the seller (or the issuer of an option) is required to sell or purchase such underlying, or deliver a certain amount in exchange for a payment called "premium". If such a right can be exercised only on the expiration date of the contract, the option is called "European", whereas if the right can be exercised at any time during the term of the corresponding contract, the option is called "American". Option can be classified as: a) "plain vanilla" options, where one can buy or sell one underlying asset at a specified strike price on a single date, and b) "exotic" options, those contracts that are not "plain vanilla" and include, among others: i) binary or digital options, where the buyer may or may not receive a certain amount if the market price of one or more underlying is higher or lower than a specified strike price; and ii) Caps or Floors, where the buyer may receive a differential of interest rates on a certain notional amount for different dates of possible exercises. Plain vanilla 5

6 options are traded in derivative exchange markets and in OTC derivative markets; while "exotic" options are traded exclusively in OTC markets. 4.5 Warrants: financial securities through which the issuer gives to the holder (or buyer), the right to buy or sell, at a future date, a certain number of underlying assets (usually equities), or to receive an amount calculated according to market value of the respective underlying (mainly equities and equity indexes) within a specified period, in exchange for the payment of a "premium". The main issuers of Warrants in México are brokerage houses. These securities should be deposited at a Securities Depositary Institution (INDEVAL in México), although usually they are not subject to trading or secondary market. 4.6 Notional amount: when derivative transaction is settled by physical delivery, the notional amount is obtained by multiplying the number of units of the underlying assets (other than interest rates, equity indexes and foreign exchanges) for the corresponding exercise price. Whereas, derivative contracts that are settled by differences (in particular, derivative transactions on interest rates and equity indexes), notional amount is used to calculate the corresponding flows. Total turnover figures in some charts may not add up exactly, due to rounding off. 4.8 Original maturity of a derivative contract: It refers to number of days between trading date and the ending of each derivative transaction (for example, for interest rate swaps, the term is calculated considering the date of the last flow to receive or to deliver; while for futures, the term is determined by the maturity date or last trading day). 6