Sales of structured products in the Mexican market have dropped by 32% at the end of October from the previous year. The recent deterioration in financial markets can be attributed to two uncertainties: the monetary normalisation of the US and the present situation in China. In addition to this stress, there is an extra dimension for Mexico, as financial market volatility tends to have a deeper impact on emerging markets. All of these factors have combined with the oil prices and unstable exchange rate of the peso, to put pressure on the local economy.
“We have seen the biggest drop in sales of foreign exchange-linked products,” said Manuel Meza (pictured), managing director, global structured solutions Latam at BBVA Bancomer. “I believe that volatility in currencies is what has driven the volumes down in this asset class.”
Sales of foreign exchange-linked products have halved this year when compared with the first ten months of 2014. Most of these peg the Mexican peso against the US dollar, but there are also a handful of products linked to the peso versus sterling and the euro, with one product linked to the Japanese yen pegged against the US dollar. The average term for currency-linked products in Mexico is about two weeks.
While FX-linked sales have suffered, sales of structured products linked to interest rates have seen a fourfold increase, jumping to US$1bn. “The possibility that the Bank of Mexico will move rates in tandem with the US Federal Reserve is what drives the market of products linked to the TIIE (Tasa de Interes Interbancaria de Equilibrio),” said Meza. Fund-linked products have also seen a significant rise of 175%, jumping to US$112m, year on year.
All major issuers in the Mexican market have suffered losses year on year. Banco Santander has had the biggest relative losses, being down 54% to US$177m. Following is Monex with a 45% drop to US$1,603m, Banamex with a 29% drop to US$673 and BBVA Bancomer with a 14% drop to US$444m.
This year has seen a shift in the distribution of sales by term, with 81% of products by volume having a term of less than one year, while 19% have a term greater than one year; last year those numbers were 91% and 9% respectively. The shift in tenors is due mostly to the increased issuance of commodity, fund, and equity index basket-linked products.
The market for registered notes has been very stable when it comes to regulation, said Meza. “Regulation has been very focused on the theme of capital and liquidity. From my point of view the practicas de venta regulation has already been assimilated in the market,” he said.
Practicas de venta was implemented in Mexico in July and coincided with a sharp decrease in the use of structured products. The regulation was criticised by the market as being too restrictive and making it too difficult for investors to buy structured notes by dividing clients into groups based on their risk appetite and applying restrictive rules.
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