BRIEFING BOOK. Data Information Knowledge WISDOM. JORGE ALEGRIA Location: Forbes, New York, New York. About Jorge Alegria... Debriefing Alegria

Transcription

1 BRIEFING BOOK Data Information Knowledge WISDOM JORGE ALEGRIA Location: Forbes, New York, New York About Jorge Alegria... 2 Debriefing Alegria 3 The Alegria Interview

2 ABOUT JORGE ALEGRIA Intelligent Investing with Steve Forbes Jorge Alegria is the chief executive officer of the Mexican Derivatives Exchange. Alegria has more than 24 years of experience in the financial sector. He was appointed senior vice president of markets and data services of the Mexican Stock Exchange. Before that, he was the chief executive officer of ABN Amro Securties in Mexico and the executive vice president of Scotiabank Inverlat. He is chairman-elect of the International Options Markets Association, which is a division of the World Federation of Exchanges. Alegria is a professor at the Mexican Autonomous Technological Institute. He graduated from ITAM with a degree in finance

3 DEBRIEFING ALEGRIA Intelligent Investing with Steve Forbes Interview conducted by Alexandra Zendrian October 4, 2010 Forbes: What trends are you noticing in your market with options and futures trading? Jorge Alegria: There's more interest from international participants to get involved; local investors are getting more familiar with these kind of instruments both for hedging and as an investment tool. How are you able to clear your derivatives? The Mexican Stock Exchange, "the Bolsa group" owns the MexDer (Derivatives Exchange) and after our initial public offering in 2008, it also acquired the Derivatives clearing house. It's a AAA Mexican central counterparty, offering the lowest credit risk to every participant, using the most modern risk management tools available. How can the U.S. get more derivatives onto exchanges? There is no doubt that the new regulation will push more activity onto regulated markets. Also, after 2008, the market itself is more aware of the benefits of having not only central clearing, but also price transparency. The largest participants (buy-side) are requiring execution in standard products through exchanges rather than tailor made trades in the OTC markets. Are there any upcoming regulations that you're concerned about? Not really. The Mexican Exchange is ready to adapt fast to this current legal environment. How is trading in Mexico in general? Why should people trade in and invest in Mexico? Mexico offers a very attractive market in terms of potential returns, in equities and in fixed income. Mexico fundamentals are quite strong, giving the peso bonds a very attractive alternative. Mexican bonds are also very liquid, and the currency (with total free convertibility) is one of the most liquid currencies worldwide. Our regulatory and tax environment is modern and friendly for foreign investments in fixed income and equities as well. The amount of bonds in foreign hands is at a historic high these days. Do you get many foreign traders in your market? Yes. Besides the presence of the most important U.S. firms that have a physical presence in the local market, we have also the proprietary trading shops trading actively in a remote mode, from New York, Chicago or London. Almost 50% of the options volume is coming from market makers here in the U.S

4 Are you trying to establish any partnerships with other exchanges or venues? We signed a strategic alliance with CME Group this year that allows order routing between the two exchanges. This is big for the Mexican Derivatives markets and for the financial sector in general. More than 100,000 users of the CME screens will be able to route orders to MexDer and trade our products anywhere. Also, every Mexican firm connected to MexDer will access, from Mexico, CME products, including commodity contracts not available in our markets today. CME bought a small equity participation in the Bolsa and is a member of our board of directors. We are also increasing our presence in Central and South America, with partnerships in specific joint ventures with markets like Colombia and Chile, for example. Does your exchange have algorithmic trading? What do you make of the proliferation of algorithmic trading? Yes. We are getting increasing order flow coming from high-frequency traders. In the cash equities market, we have experienced more than a 100% growth in orders from last year. In the derivatives market, 90% of the orders are generated from market makers and algorithmic traders. We invest heavily in technology to process all this flows with decreasing latency. What is the International Options Markets Association working on? IOMA is part of the World Federation of Exchanges, who by the way celebrates its fiftieth anniversary next week. We promote market standards and produce reliable information and statistics. We work with policy makers, regulators and government organizations for fair, transparent and efficient markets. We bring together exchange experts to improve markets

5 THE ALEGRIA INTERVIEW Intelligent Investing with Steve Forbes Mexican Derivatives Steve Forbes: Jorge, good to have you with us. Jorge Alegria: My pleasure. Forbes: Let's begin by telling us about the Mexican derivatives exchange. Alegria: Well, thank you very much for this opportunity. The Mexican derivatives exchange is a young exchange. It was born just a little bit more than 10 years ago and right now we have futures and options on the most important Mexican underlyings and the Mexican -- Forbes: So the two-year and 10-year government bonds and the like? Alegria: Correct, yes. Government bond of Mexico are very, very popular, traded in Mexico and outside Mexico. Forbes: Talking about those bond one second, Mexico issued a 100-year bond? Alegria: Yes. Forbes: At 6.1%? Over subscribed? Alegria: We learn that they were looking to $500 million and it went all the way to $1 billion and it's the third time a sovereign country issued a 100-year bond, which is amazing. Forbes: It is amazing. Congratulations. But so the exchange focuses on local Mexican products, the two-year and the 10-year government bonds and what else? Alegria: And the Mexican stock exchange index. It's called the IPC, is the name of that contract, which is definitely most widely follow indicator of the performance of the Mexican market and the stock market. And that product is also widely used by U.S. investors and international investors to hedge their exposure on Mexico and as a proxy to other Latin American countries sometimes. Mexican Pension Funds Forbes: Now talking about Mexico, local pension funds have only recently been given permission to go into individual stocks? - 5 -

6 Alegria: Yes, the Mexican pension fund system is also young. It has been -- Forbes: Well, it's got quite a few assets. Alegria: A hundred billion. It's now 10%of GDP, and it's growing at around 15, 17% a year. The population of Mexico's young and they're joining this pension system. And they were investing basically in government bonds at the beginning, then the government allows them to buy corporate paper, then indices on some stock markets, and now they are starting to do stock picking. So they are definitely the driving force in the local market for the development of the Mexican securities industry. Forbes: So that should add some real juice to the Mexican stock market? Alegria: Yes, they are very active in the Mexican stock market and they are becoming so big that they are starting to invest outside Mexico as well. They are now investing on ETFs linked to the Standard and Poor's or to the Brazilian market as well. Forbes: And you mentioned capital projects? Are those certificates of capital projects, and those are what, sort of projects with is that sort of like a bond, or how does that work? Alegria: That's a very interesting point. This year, we saw in the Mexican market the listing of a new kind of instrument, which is basically shares on a company, but to promote private equity, basically. It's a way to list private equity. It may sound a little bit funny. But these pension funds Forbes: But it's linked to a specific asset or project? Alegria: It's linked to a specific project -- toll roads, energy, infrastructure, basically, are these kind of new funds that are listed in the exchange in order to provide information for the investors, but are basically projects that are going to be maturing in the next 10 to 30 years. So those are a way to linked these pension fund money that is growing to long-term projects in the Mexican infrastructure. Forbes: And what percent are these pension funds allowed now to go into the individual stocks. Ten percent or 9%? Alegria: It's a little bit more than that. It's between 15 or 17%. It depends on the different pension funds. Some of them, the more aggressive ones are allowed to go all the way to 25%, and the other ones, more conservative are only five. So the average of that amount is 17%. Linking To The CME - 6 -

7 Forbes: And tell us about your new alliance investment, cross investment with the CME? Alegria: Well, it's a huge step for us and on the Mexican financial industry because by joining forces with the CME, essentially we are going to see international investors that are trading today. Forbes: How many terminals does CME have, 150,000, or something? Alegria: One hundred and thirty thousand. So it's huge. We have in Mexico 1,000 screens for MEXEF, and with this alliance, 130,000 screens of CME around the globe, we'll be able to trade Mexican products, which is obviously, for us, a very efficient way to attract new players. But interestingly enough, is also to see that the Mexican investors will be able to use CME products to hedge their exposure and one of the most attractive things is that for the first time, Mexican investors will be able to trade commodities. We have never been able to have a commodity exchange in Mexico, although Mexico's well known as a commodity producer. We don't have the infrastructure to have a trading platform on commodities. This alliance with CME, will allow the Mexican government, Mexican companies, producers to effectively hedge in commodities without listing a specific commodities index because it's going to be just routing orders into CME for doing that. We are very, very excited for this. Not only the north to south routing, but also the south to north routing in commodities as well. Managing Currencies Forbes: And in terms of U.S. investors coming in, there's always been the challenge in the past of collateral, dollars to pesos. You've, well, let's start with that. You don't have to do that anymore? Alegria: That's a very good point. The U.S. investors willing to trade the Mexican products, they can leave the collateral in the U.S. without doing any kind of FX transaction. Our clearinghouse, we have accounts in the U.S., and all the collateral deposited there is valid. So that makes the trading and the activity between the two exchanges, I guess more flexible and easy to do. Forbes: So more and more Americans, if they want, can do this more easily? Alegria: Yes, that's the idea. That's the idea to connect these two pools of liquidity. Forbes: And no withholding tax? Alegria: No. One of the advantages we have in Mexico is a very flexible and open tax environment and legal environment in general. There's no kind of withholding taxes when U.S. investors or international investors are trading in Mexico. Cash equities, cash bonds - 7 -

8 or derivatives, there's not any kind of distortion caused by taxes or hidden withholdings here and there is completely open and free, like U.S. investor trading in the U.S. The Language Barrier Forbes: One of the other challenges, of course, is language. How are you dealing with that? Alegria: Well, we are working a lot with CME and with our local clearing members in finding, sometimes, the proper translation. But it's basically, a training process on the local clearing members to learn English. We have technology that we bought from Spain, and it's funny, even that is Spanish with Spanish. We had a lot of trouble sometimes to understand what a Spanish word meant. Sometimes it's easier to understand it in English than in the Spanish from Madrid. Forbes: Right, right. So are you making progress on training to keep up with the growth? Alegria: Yes. This agreement with CME is not only for trading, it's also for all the training of Mexican people in the U.S. and the U.S. investors in Mexico. As a matter of fact, we just had eight to 10 pension funds in the States this week for training and we are going to emulate that in Mexico at the beginning of next year. So we think that the best promotion for our market is through training. So we are investing a lot of money in that with CME and with other companies. Less Volume, Big Contracts Forbes: And in terms of overall volume, you've experienced what we've experienced in the U.S. It's come down some. Are there particular reasons in Mexico or is it just part of a global trend that right now there's just not as much going on? Alegria: No, it is part of a trend. We saw a shift in volume, which a lot of the volume in Mexico was concentrated in the short-term -- futures on the monthly interest rates and the interbank interest rates. What happened for the last couple of years with a virtually zero interest rate policy in the United States have been keeping the Mexican short term rate very low but stable. Basically it doesn't move. So a lot of the action went to the two-year, 10-year tenor of the yield curve, where the contracts are bigger, in nominal sizing, in face value. So although they turned over in terms of the Mexican pesos is still high, in number of contracts, it's smaller. But we are very, very happy to see how the long end of the curve is evolving a service as a result of this shift. So it is less volume, but in bigger contracts. Investing In Mexico Forbes: And tell us why people should invest in Mexico, trade in Mexico and invest in Mexico. People are more open to doing more international now

9 Alegria: Yes, you mentioned the 100-year bond issue and stuff that we saw yesterday. The Mexican interest rates for two, three, five years are yielding around between four to 6%. If you see from the risk perspective, those bonds are with a very high rating. The risk-return relationship is very, very attractive. That's why we are seeing the foreign investment in Mexico in a record high. It's more than $35 billion of Mexican bonds are owned by international investors. Basically U.S. investors. Forbes: Now are these bonds denominated in pesos? Alegria: These bonds are denominated in pesos. And also the Mexican government is active issuing in dollar terms, like the one we saw yesterday. But the ones I'm talking about are the peso bonds. And with the incredibly liquid currency like the peso, which is one of the most liquid currencies in the world, so the risks associated with that premium are relatively low, I would say. Upcoming Election's Effect Forbes: Now, you have a presidential election in the offing coming up. What's that going to mean for the value of the peso, do you think? Or is the political situation mature enough that we don't have to worry about what happened in the mid-nineties? Alegria: Yes, we saw in the last two elections, which were as many elections in the world; there are some complications, some noise around that kind of process, I would say, everywhere in the world. Mexico was not the exception in the year 2000 and in the year We saw in the year 2000 a new party entering into power, which in many cases can mean additional risks. However, the Mexican peso stayed very, very strong and very firm. And the same thing happened on the 2006 election, where President Calderon won by a very small difference. Forbes: A real three-way race. Alegria: Yes. So we saw, even the potential of legal actions and people claiming and even demonstrations in the street, but the Mexican peso and the financials market were quite strong. The peso didn't suffer. We saw a little bit of volatility, but I think we learned the lesson that the free convertibility is adding a lot of liquidity into the currency and it fluctuates freely, and gives the opportunity to buy and sell without any problems. So I would say that, the Mexican peso is a very strong currency in that sense. And even though it is going to be a political election, we don't foresee any impact on the peso. Forbes: Good. Alegria: Because of that reason, of course

10 Reforms And Transparency Forbes: Looking at the U.S. from your perspective, how do we get more of our derivatives on the exchanges and get more transparency? Do you think this new reform bill is going to help or how do you see it evolving in the U.S.? Alegria: I think, it's a pendulum situation. We went from no regulation at all, total, or a huge lack of transparency in 2008, to now a bill that clearly is going to impact in many ways, the way firms are doing their derivatives business. I think there's going to be an impact. However, the good thing is that the derivatives trading will enjoy much more transparency. Because it's not only the clearing, it's not only to bring derivatives into clearinghouses, but also the mandatory aspect of having these standardized derivatives trading in an exchange or on a platform, will bring a lot of transparency as well not only for the regulators, but for the public in general in terms of what's going on, what's the real level of this kind of products which, I guess, are quite important for efficient management of portfolios. So I think, although, we have these risks of moving from one end into completely the opposite one, the bottom-line is positive in the sense of adding more transparency for these activities. And that the U.S. I think is going to be some implications in the medium-term or short-term in other countries, definitely, Mexico as well, following similar rules. Forbes: And you mentioned Brazil earlier, which is notorious for how difficult it is to set up an account. You've simplified that procedure in Mexico, right? Alegria: Yes, I think it's part of this friendly legal framework we have in Mexico with foreign investors. It's very easy. So you can open an account and obviously, all the "know your customer" policies and there are very high filters of compliance. But it's pretty much the same thing as opening an account in a U.S. broker-dealer or U.S. bank. It's easier and, more importantly, the cost of setting up an account is quite easier, much more easier than many emerging markets in general. You can do it through a U.S. broker-dealer too. Forbes: And final question on Mexico, what further reforms do you think need to be made to enable Mexico to achieve the kind of growth rates we see in countries such as India and China? Alegria: That's, I think, it's very clear that energy is a reform that the country needs. A real reform to allow international and private investments in that sector. I think, the example we saw in other countries, this same year in the case of Brazil raising $70 billion and the largest offer ever, whatever the structure was set up, I think it's a lesson that the Mexican, the Mexican political sector, congress, they need to think about in terms of how to really take advantage of the richness we have in Mexico in terms of commodities and energy

11 And to I guess open up a little and just open the debate because it is clear, that if we see where Petrobras were 10 years ago, what Pemex was 10 years ago and where we are now, where they are now, I think there are lessons to be learned. And on the other side, the Mexican markets are much more mature in terms of information, in terms of corporate governance. All that together I think gives the alternative of having companies, private companies, companies owned by the government today, to have this mix to allow them to grow much more efficiently. Energy, I think, would be the number one reform needed. Forbes: And how did the Mexican government do so well in hedging on oil taxes, using those options, when private companies didn't do so well? Alegria: Yes, the central bank, the people in the central bank, the people in the ministry of finance are very smart, and that's another lesson of how these people doing the right thing can achieve very good results. They follow a very disciplined strategy and they have been doing it for many years. They have been doing this for many years. They learn, they are very well trained in the use of these instruments. And I like to use that example a lot, when the people question about all the problems that the derivatives market caused in many Mexican companies or international companies. Well, there are also very good lessons and very good examples of how derivatives can help to manage risks. And in this case, they keep the budget of Mexico balanced in a very difficult year, when the oil price came down and Mexico exercised that hedge that they put in place one year before. And it's a very good example of how to manage risks and that derivatives are not an expense, but an investment sometimes in managing risks and on balance sheets. Forbes: Great. Thank you, Jorge. Alegria: My pleasure. Thank you very much for this invitation and it's a privilege for me to be here. Forbes: Thank you