Derivatives data at Banco de Mexico: Its structure and uses Session: Central Bank Sources and Uses of Derivative Statistics ISI 2015. World Statistics Congress

July 2015

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The views and conclusions presented here are responsibility of the author and do not necessarily reflect those of Banco de Mexico.

Disclosure

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• The global financial crisis of 2008 unveiled weaknesses in the task of financial authorities to identify and monitor risks undertaken in derivatives market. In some countries, OTC derivatives market instead of mitigating risks, contributed to its propagation, particularly by increasing uncertainty of risk positions and the lack of information of these transactions and its counterparties involved.

• To contribute in mitigating these risks, the G20 has promoted some international initiatives. Particularly in derivatives market, promoted the initiative that all OTC derivative transactions shall report to trade repositories (TRs), providing to financial authorities a new set of data for risk monitoring and research.

• On this matter, Banco de Mexico has been collecting daily all derivatives transactions traded by banks and brokerage houses in both OTC and Exchanges, for more than ten years .

Introduction

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ORIGIN: Tequila crisis 1994-1995

Top-

Dow

n M

odel

(A

d-ho

c ag

greg

ate

requ

irem

ents

)

DECISION: Building a

micro-data

model

RESULT: Current

model of information

Banks Balance Sheets

Transactional information

Derivatives

Securities

…

Capital adequacy

Aggregated & regulatory

information

…

NEW INFORMATION NECESSITIES:

Macro Financial,

Macro Prudential

& Micro

Prudential Supervision

Bott

om-U

p M

odel

(M

icro

-dat

a re

quire

men

ts)

Financial Information Model: Derivatives

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• Banco de Mexico has a wide coverage in derivatives transaction information, just missing trades of unregulated financial institutions and the transactions of nonfinancial entities with foreign counterparties.

• The daily data collected includes the information of all terms in the trade date and all changes in the life cycle of every transaction, including characteristics of the instrument, the underlying, counterparties, collaterals, among others. In addition, there is a snap-shot collection that includes characteristics as the market valuation and “deltas” (in the case of options) of all outstanding transactions in a monthly (weekly from October onwards) basis.

• This richness of data and the data management allows Banco de México to perform the function of Trade Repository (TR) for these transactions.

Financial Information Model: Derivatives

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Financial Information Model: Derivatives

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• Micro-data on derivatives in Banco de Mexico, have different uses, mainly of market surveillance and financial stability:

Monitoring the functioning of the market and compliance of regulation;

Detailed of all derivatives transactions involved in the regulatory framework of Capital Adequacy Ratio and Liquidity Coverage Ratio requirements, FX positions and currency and maturity mismatches, among others;

Analysis of credit risk, which considers all risk positions of a given financial institution with its counterparties; and

Analysis of market risk of the portfolio of financial institutions by type of instrument and underlying.

Uses of the Data

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Exposures in Derivatives All Interfinancial Exposures

Uses of the Data: Systemic Network Contagion

Inside circle ( ) Banks; middle circle ( ) Pension and Investment Funds; outside circle ( ) International Banks. Arrows represents expositions exposures between institutions.

• Also richness of micro-data has allow developing models for analyzing systemic risk arising from the network of daily exposures.

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• Nonetheless, the generation of statistics using this information has been underdeveloped.

• Demand for information of derivative market has increased, after the shrinkage that these trades with the 2008 crisis and the recent recovery and change in composition towards OTC trades.

• The change in regulation on these markets has increase the need of public information.

• Banco de Mexico has a project of generating new statistics to increase market transparency and to improve monitoring of these markets and institutions. The first phase (turnover) includes a set of daily statistics for period January 2007 to 2015.

• Turnover and outstanding operations statistics are organized, firstly, by instrument and then a breakdown by: i) underlying assets, ii) characteristics of the counterparty, iii) type of market and iv) original maturity.

New Statistics on Derivatives to be published

Structure of derivatives turnover traded by banks and brokerage houses (Exchanges and OTC)

Derivatives transactions by instrument

Swaps Futures Forwards Options and

Warrants

• By underlying (currencies, interest rates, securities, equity, indices, etc.)

• By location of counterparty

• By market (Exchanges or OTC)

• By original maturity

Buying Selling

Plain

vanilla

Warrants Exotic

• By underlying • By location of counterparty • By market (Exchanges or OTC) • By original maturity

Sub-

cate

gorie

s

Sub-

cate

gorie

s

Classification of data series on turnover of derivatives traded by banks and brokerage houses (Exchanges and OTC)

By location of counterparty and Market By original maturity

By instrument and underlying

- Counterparties with Mexico residence• Financial entities• Non-financial entities

- Counterparties with foreign residence• Financial entities• Non-financial entities

From 1 to 7 From 1,097 to 1,461From 8 to 31 From 1,462 to 1,827From 32 to 92 From 1,828 to 2,557From 93 to 184 From 2,558 to 3,653From 185 to 366 From 3,654 to 5,479From 367 to 731 From 5,480 to 7,305From 732 to 1096 More than 7,306

In days

Underlying Swaps Futures Forwards Options (plain vanilla)

Exotic Options

Warrants

Interest rates Equity or Indices Debt securities Currencies Commodities Other derivatives Others

Banks and Brokerage Houses Derivative Positions

Interest rates Securities Equity Stock Price Indexes Others I. Underlying Assets

II. Counterparty

With Mexico residence - Financial entities (Commercial Banks, Pension Fund, MexDer) - Non Financial entities (Enterprises, Persons)

With foreign residence - Financial entities (Commercial Banks, Exchange Markets) - Non Financial entities (Enterprises, Persons)

III.

Cur

renc

y

Dom

estic

(MXP

)

Fore

ign

(FX)

Long Position Short Position Net Position

Swaps Futures and Forwards

Options and Warrants

CLASSIFICATION OF DATA SERIES

DERIVATIVE INSTRUMENTS

TYPE OF POSITIONS

I

II

III

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Derivatives turnover (Banks and Brokerage Houses)

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013 2014

Trill

ions

of p

esos

Options & Warrants Futures Forward Swaps

By instrument

0

25

50

75

100

2007 2008 2009 2010 2011 2012 2013 2014Pe

r cen

t

TIIE Interest rate Other Interest rate Stocks & indexes

Others US dollar

By type of underlying

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By instrument and financial institution By type of financial institution

0

50

100

2007 2014 2007 2014 2007 2014

Futures & Forwards Swaps Options andWarrants

Per c

ent

Commercial & Development Banks Brokerage Houses

0

20

40

2007 2008 2009 2010 2011 2012 2013 2014

Trill

ions

of p

esos

Commercial & Development Banks Brokerage Houses

Derivatives turnover (Banks and Brokerage Houses)

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By type of market By type of counterparty

0

25

50

75

100

2007 2008 2009 2010 2011 2012 2013 2014

Per c

ent

Banks US Banks EUOther Banks Banks MexPension Funds Other Financial EntitiesNon Financial Entities

OTC

Exchange's derivatives markets

0

20

40

2007 2008 2009 2010 2011 2012 2013 2014

Trill

ions

of p

esos

MexDer Foreign Exchange's Derivatives Markets

OTC with Mexico residence OTC with foreign residence

Derivatives turnover (Banks and Brokerage Houses)

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By original maturity Instruments by original maturity

0

20

40

2007 2008 2009 2010 2011 2012 2013 2014

Trill

ions

of p

esos

To 3 months More 3 to 6 months More 6 months to 1 year

More 1 to 2 years More 2 to 3 years More 3 to 5 years

More 5 years

0

50

100

2007 2014 2007 2014 2007 2014

Futures & Forwards Swaps Options and Warrants

Per C

ent

To 3 months More 3 to 6 months More 6 months to 1 year

More 1 to 2 years More 2 to 3 years More 3 to 5 years

More 5 years

Derivatives turnover (Banks and Brokerage Houses)

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• Micro-data on derivatives and other financial instruments, provides flexibility to generate information required for different users in central banks and by market participants and analysts.

• In the case of Mexico, complete information on exposures of financial institutions to all derivative markets, allows the development of innovative network analysis, among other financial stability uses.

• With the new derivative statistics it is possible to improve the knowledge of this market, monitoring market changes, determine aggregate exposures by sectors and improve transparency for all market participants.

• With the establishment of TRs in the main economies, information on derivatives will become widely available, reducing risks and improving the analytical capabilities of central banks and other financial authorities.

Final Remarks