LATIN AMERICA 2018
Contents 7 Introduction:
Galen Stops, Editor, Profit & Loss
8 Opening Keynote Address: Recent Developments in the Mexican Financial Markets
Juan Garcia, Director of Domestic Operations, Banco de Mexico
10 Presentation:
Mexico Elections: Has the Country Reached a Turning Point? Gabriel Casillas, P.h. D., Managing Director, Investor Relations Officer and Chief Economist, Banorte-Ixe Bank
12 Panel 1:
Navigating Choppy Waters
14 Presentation
NAFTA 2.0: The Good, the Bad & The Impact for FX Markets Dr. Wouter P.F. Schmit Jongbloed LL.M., Head of Political Risk Analysis, ExanteData
18 Fireside Chat:
The Role of Derivatives in Mexico’s FX Market
19 P&L Talk Series with Gary Flagler
22 Panel 2:
Learning to Ride the Cryptocurrency Rollercoaster
23 Crypto-Assets:
Too Big to Ignore, Too Challenging to Trade?
26 Panel 3:
Think Global, Trade Local or Think Local, Trade Global?
28 Panel 4: 2
The FX Global Code – What You Need to Know
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Introduction:
Moderator: Galen Stops, Editor, Profit & Loss
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Opening Keynote Address
Recent Developments in the Mexican Financial Markets Juan Garcia, Director of Domestic Operations, Banco de Mexico
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Presentation
Mexico Elections: Has the Country Reached a Turning Point?
Gabriel Casillas, P.h. D., Managing Director, Investor Relations Officer and Chief Economist, Banorte-Ixe Bank
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Panel 1: Navigating Choppy Waters
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L-R: Richard Cochinos, Executive Director, UBS • Sergio Mendez, CIO, Afore Banorte • Alfredo Sordo Janeiro, CIO, Director de Inversiones, SAM Asset Management • Moderator: Gabriel Casillas, Managing Director, Investor Relations Officer and Chief Economist, Banorte-Ixe Bank
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Presentation
NAFTA 2.0: The Good, the Bad & The Impact for FX Markets Dr. Wouter P.F. Schmit Jongbloed LL.M., Head of Political Risk Analysis, ExanteData
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Fireside Chat: The Role of Derivatives in Mexico’s FX Market
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L-R: Moderator: Galen Stops, Editor, Profit & Loss • A. Gary Flagler, Head of International Business Development, Derivatives, MexDer
P&L Talk Series with Gary Flagler In an interview at Profit & Loss Latin America 2018 conference, Gary Flagler, Head of International Business Development, Derivatives, at MexDer, talked about the Mexican exchange’s future growth plans.
Profit & Loss: What's been your focus since you joined the exchange last year? Gary Flagler: We can sum up our international initiative in one word and three parts, and that word is: Connectivity. When I talk about connectivity, I'm talking about connectivity to international clients, whether they're professional trading groups, hedge funds, commodity trading advisors, asset managers and, to a lesser extent, banks, corporates, mutual funds, pension funds and retail. The second part of the connectivity component has to do with connecting to trading platforms. It's important for the clients that they can access our markets through a variety of different trading platforms, whether they are proprietary or ISVs. We had an order routing arrangement with the CME Group that lasted from 2010 up until 2017. We mutually ended that arrangement last August 2017. We’re pursuing a different angle now, replacing Globex with a NY5 Point-of-Presence (PoP) at the Equinix Data Center in Secaucus, New Jersey. The third phase of connectivity has to do with connecting to US and international futures brokers so that their clients who are trading through them can also access our products.
P&L: Talking there about the importance of connectivity and building out international participation, why is it important to the exchange group to build out this international participation? Do they really need to look further abroad to expand? GF: Yes, the importance of having international business is that it can contribute to better pricing. The professional trading groups provide a tremendous service to international markets and economies by providing liquidity and economic stability. So, for us it's very important to get international business, not only from professional trading groups, but other buy side clients like hedge funds, CTAs and asset managers. To improve pricing. Create a better local marketplace. In terms of lower bid-ask spreads. And lower costs and more efficient markets for market participants. P&L: What’s the case you put forward to international market partici-
pants as to why they should be trading on your platform specifically? GF: Well the first reason is for the profit opportunity, but it’s also important to note that quality firms do business not only to make money, but also to contribute economically or socially. So, we are also appealing to international clients, not only based on the profitability opportunities offered by the MexDer financial products, but also on a sustainability role they can play to contribute to the ongoing improvement of the Mexican economy and marketplace. Price discovery for exchange-listed Mexican derivatives best promotes macroeconomic stability when those transactions occur locally. And a strong Mexican economy benefits everyone, not only in Mexico, but north and south, too.
P&L: Let's talk about the FX market specifically. Who do you see as the real drivers of growth in this market? You've mentioned various different client types, but do you see this growth really being driven by prop trading firms or HFTs? Or is it the big pension funds [Afores] that need to hedge an exposure? Where do you see this growth coming from? GF: Right now, about 50% of the business on the MexDer MXN/USD futures comes from banks. Approximately 25% comes from assets managers for mutual funds and pension funds. The remaining 25% comes from professional trading groups, hedge funds, corporates and retail. I think the growth is going to come from the international professional trading groups. Also, international hedge funds, commodity trading advisors and asset managers. It’s like a swimming pool, once one person jumps in, then it gives other people the confidence to jump in right after them.
P&L: How do you see the technology shaping how the derivatives market evolves? GF: Well in terms of execution I don’t see that much changing over the next one to three years. There may be a trend towards the automation of exchange for physicals, or EFPs, but that’s to be determined. I believe largesize block trade orders are going to continue to be done via the telephone. Traders want to ‘fill or kill’. They want it all done at once because a lot of times people don't want to show their liquidity on a screen. By contrast, the smaller orders will continue to be executed via a trading screen. Where I do see technology having an enormous impact moving forward in FX and listed derivatives is on the clearing side. There are developments in blockchain technology, for example the Australian Stock Exchange is starting
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to move towards a blockchain solution for daily settlement. It's something that, as part of Grupo BMV, we're looking into. The other interesting technological development is on the trading side where we’re seeing hedge funds starting to allocate more money towards building artificial intelligence tools.
P&L: Looking ahead, where are you going to be focused on specifically with regards to growing the exchange? GF: Well, in addition to building out international participation on the exchange, we're also looking at new products. Our primary products are the MXN/USD futures, our stock index futures and options, individual stock options and single stock futures. And we also have Mexican government bond futures. Foreign investors currently own over 50% of the Mexican government debt, but in addition to this, we're waiting for regulatory approval to list a corn options contract down here. What the heck does that have to do with foreign exchange? Everything! That corn contract is built for Mexican clients here – primarily the small farmers, but also for the government accounts that provide these small farmers subsidies and pricing. It's going to be denominated in pesos, it's going to be metric tons, there's going to be an FX cross hedging opportunity between the CBOT corn and our contract. There’s also the mismatch between metric tons and bushels. So, this has enormous arbitrage opportunities – much like the arbitrage between the NYMEX versus ICE versus NFX natural gas contracts. The feedback that we're getting from prospective new international and local clients is extremely positive. We're also looking later this year to list a local electricity futures contract. We are very excited about these prospects – we have interest from several international clients. We are proud to be a part of one of Mexico’s most prestigious financial institutions. Bolsa Mexicana de Valores, the Mexican Stock Exchange, celebrates it’s 124-year anniversary this coming October 31st. The startup of the Mexican derivatives market marked a historic milestone in the development and internationalisation of the Mexican financial system some 20 years ago. We look forward to our 20-year anniversary with excitement and optimism for the future this coming December 15th. Thank you, Galen, for the opportunity to chat with you here at the Profit & Loss Latin America 2018 conference. What a fantastic event. Thank you again!
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Panel 2: Learning to Ride the Cryptocurrency Rollercoaster
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L-R: Michael Moro, CEO, Genesis Trading • Carlos Mosquera Benatuil, General Partner, Solidus Capital • James Radecki, Global Head of Business Development, Cumberland • Jose Rodriguez, Vice President of Payments, Bitso • Moderator: Galen Stops, Editor, Profit & Loss
Crypto-Assets: Too Big to Ignore, Too Challenging to Trade? Although cryptocurrencies have become too big for institutional investors to ignore, there are still significant barriers deterring them from entering the crypto space, said speakers at Profit & Loss’ 2018 Latin America conference in Mexico City.
Speaking on a panel at the event, Michael Moro, the CEO of Genesis Trading, argued that a lot of traditional financial services firms were caught out by both the popularity and the longevity of crypto-assets. “I believe that – especially in the US – that the major institutions got caught. I don't believe they ever wanted to deal in cryptos, they thought it was a fad or a ponzi scheme and were waiting for the bubble to burst and the whole thing to go away. But instead this market has grown significantly, both in terms of employment and dollars, and the price appreciation of cryptos in 2017 got to a point where institutions could no longer claim that this is simply going to go away. So now these institutions are scrambling to try to figure out what their strategy is regarding these assets because it's now becoming a market that you just simply can't ignore anymore,” he said. Similarly, James Radecki, global head of business development at Cumberland, said that “the institutional money keeps inching closer and closer” to the crypto markets, but he added that there are a number of factors that are currently inhibiting these firms from actually becoming active participants in these markets. “There are five barriers to entry that are keeping all that institutional money from crossing over. The first is global access to liquidity; when big money comes in they don't want to have to scrape across multiple different liquidity destinations to get their fill at a price,” he said. The second barrier listed by Radecki was the settlement process. He pointed out that settlement in fiat currency can be difficult and slow and the repo market and lending markets that are necessary to help grease the wheels in a traditional financial ecosystem are lacking in the crypto markets. Radecki said that the third barrier is concern about the custody and security of these assets, although he claimed that there are numerous firms that are working “feverishly” to try and produce solutions that could help alleviate these concerns. He continued: “The fourth barrier, believe it or not, is research. There is no standardisation or harmonisation in the way that people value these products. In 2017 we hit an inflection point where years of education that had
built up around blockchain and crypto-assets were matched with venture capital and lit this wick of market activity. We think that 2018 will be the year where products are either adopted or fail and we’ll get a better sense of where valuations should be. People will start harmonising the way that they set valuations, and this will make it much easier for the real institutional money to crossover.” But, perhaps the most important barrier of all, said Radecki, is regulation, and more specifically the uncertainty about the future regulatory treatment of crypto-assets. “We could all benefit from a little certainty in the global regulatory platform,” he concluded. This last point in particular was echoed by other speakers on the panel. “[Regulation] is one of the things that could kill our business or it could make it explode because of the opportunity,” said José Rodríguez, the vice president of payments at the cryptocurrency exchange, Bitso. Carlos Mosquera Benatuil, general partner at the hedge fund, Solidus Capital, clarified that his firm is hopeful for more regulatory clarity as opposed more regulation going forward. “What we worry about is: Who is going to be regulating this? Do they really know this market and understand this technology? What we don’t want is a situation where the regulators don't understand what they're trying to regulate. So we right now we just want regulatory clarity,” he said. Unsurprisingly given the panel topic, there were numerous questions for the panellists from the audience, the first of which centred around the value of crypto-assets. Namely, the audience wanted to know: where is the intrinsic value of these assets? Mosquera Benatuil initially responded by pointing out that there is roughly $8 trillion of value attached to art pieces in the world, items that have no utility value and whose values are highly subjective. Rodríguez then went on to add that cryptocurrencies do, in fact, have utility value due to the solutions that can be built on top of the technology underpinning them. “To give you an example, we use bitcoin for international transfers, for remittances. These payments cannot be fraudulent – it’s not like with a credit card where the card can be cloned – there’s no chargebacks and you can make transactions 24/7. Can your bank make a payment from Mexico to India in one minute? No, it takes more than a week and it will probably never settle.
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By contrast, with this technology we actually can send that payment in just one minute,” said Rodríguez. He continued: “We’re launching a card right now that will enable users to pay with their Bitso balance anywhere that accepts Visa or Mastercard. So it’s still early days, but these are some use cases and, whether it’s using the technology from bitcoin or ethereum or ripple or litecoin, we can build solutions that traditional financial technology cannot match right now.” But despite this potential utility value, Mosquera Benatuil explained that crypto-assets are still regarded as high risk investments and therefore many
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of the more institutional sized players only want to hold a small amount relative to their overall portfolio. “This is a super high risk investment for institutions, and that's why we're recommending to treat it as an asymmetric investment. So these firms usually invest one to two percent tops from their traditional portfolio in these assets. In the region in Latin America region we’ve actually seen some families divest from gold and invest that same amount of money into crypto, so they clearly feel like it is a new store of value. But like any new asset class, they only invest in it as a small percentage of their total portfolio,” he said.
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Panel 3: Think Global, Trade Local or Think Local, Trade Global?
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L-R: Matt O’Hara, CEO, 360T Americas • Javier Alvarado Chapa, CEO, Monex Casa de Bolsa • Alejandro Padilla, Head Strategist – Fixed Income and FX, Banorte • Moderator: Galen Stops, Editor, Profit & Loss
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Panel 4: The FX Global Code – What You Need to Know
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L-R: Gilberto Romero, Director de Mercados, Banco Ve Por Mas • Mayte Rico, Domestic Operations Division Manager, Banco de Mexico • David Puth, Vice Chair, Global FX Committee; CEO, CLS • Moderator: Galen Stops, Editor, Profit & Loss
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