Monex: we must leverage technology to grow the market

SRP spoke to Damian Vera (pictured), co-heads of derivatives sales and structuring at Monex alongside Louis de Winter, about last year’s activities, market trends and the need to digitalise processes to grow the market.

“We have seen an 18% fall in volumes year on year up until the end of Q3. However, this is not bad news for us because despite the falling volumes we have increased our fee revenues by 20%,” said Vera.

All in all, Monex’s performance is similar to that of 2021, but the higher rates environment has allowed the product provider to offset the fall in activity.

“Our growth over the last few years has been above our expectations and our ten-year performance has been stellar with just a few periods were growth was lower,” said Vera.

In 2022 the focus was mainly based on two product linesdual currency notes and range accruals.

Dual currency notes drive higher volumes in high vol environments but tend to fall when volatility comes down - when vol is high the spot price is high and investors tend to buy notes in USD; when the spot is high demand for USD-denominated notes is higher and when the spot is low investors shift to MXN-denominated notes, according to Vera.

“Regardless of the market environment, demand for these products remains high and is a very profitable product for distributors,” he said.

Product Trends

Dual currency notes remain Monex’s flagship product but had to adapt since the beginning of the Covid pandemic when interest rates in Mexico went down from 8-9% to 5% or so although not as much as in other markets.

“This triggered a shift from investors towards double no-touch notes which are riskier but offered good value as the spot has remained between the 21-19% range. This product has been the most popular over the last two years alongside the wedding cake structure which is a similar payoff structure but with three [barrier] levels.”

During 2022, with lower volatilities, the performance of these products has suffered somehow, said Vera, and the spike in interest rates triggered a shift towards risk free fixed income products which can offer up to 10% returns in Mexico.

“That also had an impact on the dual currency notes business,” said Vera. “However, the increase in interest rates allowed us to revive the range accrual pay off which was a big success at Monex about 6 years ago.

“Investors see these products as less risky, so we registered a significant shift because the range accrual also priced well with USD-denomination. Range accruals revived in 2022.”

Vera notes that this type of structure is not viable with low interest rates as the issuer pays a higher premium than with a double no-touch note.

“For a while we did these products as a service to our clients because you could only get 10bps but with the current levels you can offer good returns and charge 60 bps which makes it viable for the business,” he said.

The Big Shift

The shift towards capital protection is also happening in Mexico as the product mix aligns with the macro environment.

“We have now started to issue products linked to the Tasa de interés interbancaria de equilibrio (TIIE) again after a few years of no issuance of products linked to the Interbank Equilibrium Interest Rate,” said Vera.

This is new territory for Monex as “there was no real demand from our clients”.

However, some of the company’s intermediary affiliates like Actinver and other banks started to request this product and is proving to be “a big success”.

“In just a few months we have seen demand and volumes increasing significantly because it allows investors to express their view on the TIE,” said Vera. “These products are more opportunistic, so we have focused on short terms of three to four months. The range is not static and we staircase them to reflect the bids and expectations of analysts on what the Bank of Mexico and the Fed are going to do.”

According to Vera, this product does not make much sense when you have low interest rates and the markets are also low because again “as an issuer you pay a high premium”.

“However, in the current rates environment we expect demand for this product to remain high because we all know that interest rates are going to go up and there is opportunity for investors to capitalise on those moves,” he said.

Market Hurdles

Regulatory constraints in Mexico continue to impact the ability of product providers to bring new structures and ideas to the market.

“The issuance process is painstakingly slow and bureaucratic which limits how much you can issue in one day - we have now very short trading windows to launch our products,” said Vera. “The paperwork makes the process costly and we had to make adjustments to make it efficient.”

Vera believes that the industry “must find new ways to simplify the process for the industry to leap forward and grow the market”.

“We think it is important to have a strong disclosure and reporting framework but at this time and age we must leverage the digital tools at our disposal and take advantage of technology to make processes cost efficient and paperless,” he said.

Vera also noted that there is also a need for the regulator to differentiate the different types of issuances and products as “you cannot put in the same bucket a five-year product with MXN800m volume and a one-week note with MXN10m”.

“It does not make sense and limits our ability to deliver these products as well as the investor choice.”

INTEREST RATES, FX ONLY

The market for equities in Mexico remains almost symbolic with the focus being on interest rates and FX.

“We have done equity products mainly linked to indices in the past, but it was too expensive, and the demand did not justify the fees we had to pay the index provider,” said Vera. “If we had demand for a particular equity product, we usually go to other issuers.”

With equity products being marginal in Mexico the scope to introduce custom strategies is very limited, also because the type of investor in this market is not familiar with the equity markets but very well acquainted with interest rates.

“Mexican investors are familiar with the interest rate as it resonates with them - it is an asset people speak about all the time,” said Vera. “For us to put an investor on a note linked to a proprietary underlying it would be an unnecessary risk. Our target market is not as versed on equity markets and it would be wrong to expose them to something they don’t really understand.”