In support of the Mexican market’s mandatory transition from 28-Day TIIE to F-TIIE, on November 22, 2024, we completed the primary conversion of approximately MX$42 trillion pesos of legacy in-scope 28D TIIE swaps to equivalent F-TIIE positions, thus shifting the pool of liquidity for cleared Mexican interest rate swaps to the new index. Following this successful conversion, approximately 95% of new trading activity in the OTC swap market has been tied to the F-TIIE rate. 

While short-dated trades (maturities through the end of 2025) are still able to be indexed to 28D TIIE under Banxico’s exemption, many clients have indicated their preference is to clean up this residual exposure to the legacy rate. Some participants have already begun switching their remaining 28D TIIE swaps in the exempt 2025 one-year period to F-TIIE on a voluntary basis to avoid managing multiple indices. Additionally, we continue to work closely with TriOptima and market participants to help coordinate compression cycles to further reduce exposures.

As participants look to unwind this short-end 28D TIIE risk and establish F-TIIE positions in their place, our monthly F-TIIE futures provide a convenient vehicle to manage this front end risk.

A key advantage of the F-TIIE futures is that they allow for increased granularity of trading in the short end of the Mexican yield curve. With monthly contracts listed out for 25 consecutive months, F-TIIE futures offer a targeted instrument to hedge or gain exposure to the benchmark rate. This is especially true when it comes to expressing near-term views, given that F-TIIE futures offer liquid monthly exposure beginning with the nearest two calendar months, while in the OTC swap market the shortest tenor with reliable liquidity is the 3x1 bucket (three 28-day periods of the floating rate versus a fixed rate). 

For market participants looking to opine or hedge against upcoming monetary policy decisions in the Mexican market, futures can be a very useful tool to target the relevant months around the central bank meeting. Spread trading of different months of F-TIIE futures can also be used to target relative moves in the benchmark rate, with Globex listed spreads providing the ability to enter or exit spread positions without any legging risk. For more information about using F-TIIE futures to trade Banco de Mexico policy decisions, see this more detailed paper.

Global short-term interest rate (STIR) markets such as those across the United States (SOFR), Europe (Euribor/ESTR), UK (SONIA), Brazil (DI) have long used a combination of significant futures trading (especially for front-end granularity) and swaps trading (often filling out longer-dated positions). Together, these instruments allow for robust curve construction, enabling efficient and sophisticated risk management and ensuring transparent pricing with alignment among related instruments. The addition of an active futures market will modernize and improve STIR market structure to the benefit of industry participants who rely on F-TIIE liquidity.

The market screenshots below show the strong liquidity in F-TIIE futures, particularly for short-dated contract months.

There are multiple benefits of layering futures onto existing OTC trading strategies. Central limit order books (CLOBs) used for futures trading offer transparent pricing, capital efficiencies and around-the-clock access nearly 23 hours a day. Futures contracts are also all-to-all, standardized instruments, which facilitate concentration of liquidity and broad access to a wide array of different market participants. 

In instances where sufficient CLOB liquidity may not be available for certain instruments, other execution methods like blocks and requests-for-quotes (RFQs) can also be utilized to source liquidity. For F-TIIE futures, the low block threshold of 10 contracts means that any trade of 10 lots or more can be executed as a block transaction. A list of block market makers with contact details is available on our website.

With F-TIIE now the liquid primary benchmark interest rate for the Mexican derivatives market, we have developed a comprehensive offering for participants to express their views across the entire curve. F-TIIE futures can provide significant value, improve efficiency and liquidity and serve as a useful tool for participants looking to complement their OTC interest rate swap activity, particularly in the short end of the yield curve.

Additional use cases may be of interest to certain market participants:

F-TIIE futures can also be useful when considering one’s existing exposures in cleared F-TIIE swaps. Our valuation curve for F-TIIE overnight index swaps is constructed using inputs from several market sources, including the settlement prices for the nearest F-TIIE futures expiries. This means that trading activity in the futures market will flow into our cleared swap valuation. Hence, making them an ideal tool for managing daily variation margin movements associated with cleared swaps and short-end curve volatility in the Mexican swap market.

As part of the measures undertaken by Banxico in its transition from the legacy rate to F-TIIE, it established a modified methodology for how the 28D TIIE rate will be calculated starting on January 1, 2025. In simple terms, this modification links 28D TIIE and transforms it into a derivative of F-TIIE, where the calculation involves taking the prior day’s F-TIIE rate observation, compounding that single observation 28 times, and adding a fixed spread of 24bps. All existing instruments linked to 28D TIIE will be subject to this modified rate calculation once it becomes effective, including cleared swaps through the end of 2025, as well as any bilateral (uncleared) swaps for the remainder of their lifespan. 

A key consideration with this calculation is that existing 28D TIIE exposures are thereby extremely sensitive to the single F-TIIE rate observation that underpins the modified rate. F-TIIE futures offer participants a more precise instrument for hedging this reset risk for their 28D TIIE swaps once the modified rate calculation becomes effective.