Using F-TIIE Futures to Trade Banco de Mexico Policy Decisions
Mexican Central Bank Governing Board meetings are some of the most closely watched and widely reported economic events on the Mexican financial calendar.
Monetary policy is discussed at these Governing Board meetings, which take place eight times a year with statements released at 1:00 p.m. following each meeting. Statements are usually scheduled for Thursdays and are spaced relatively evenly throughout the calendar year in a similar fashion to the U.S. Federal Open Market Committee (FOMC) meetings.
Any change of policy agreed by the Governing Board will have an immediate impact on market interest rates, as measured by Mexico’s Funding Interbank Equilibrium Interest Rate, which is referred to by its Spanish acronym F-TIIE (TIIE de Fondeo).
F-TIIE futures
We list 25 monthly Mexican F-TIIE futures contracts on our central matching engine, Globex. Contracts in the first 12 months typically represent the market view of Central Bank policy.
These instruments allow market participants to hedge existing risks associated with changes to the Mexican interest rate or take a speculative view of upcoming policy adjustments. Contracts in the following year can be used to hedge long-term funding requirements.
Our F-TIIE futures settle at the end of each month, based on 100 minus the compounded average of each day’s Overnight TIIE Funding Rate.
F-TIIE rates are assigned to every day in a month, including weekends and holidays. On weekends and holidays, rates are assigned based on the previous business day’s rate. For example, the rate assigned to a Saturday and Sunday will be the same rate that was published for the Friday prior to the weekend (assuming Friday was not a holiday). The compounded mean is calculated including all days in a month such that the accrual period of interest is always one day.
At any given time, the quoted price of F-TIIE futures represents the market consensus of what the compounded daily average of the F-TIIE will be at the end of the month. The Central Bank of Mexico publishes the daily F-TIIE rate at approximately 5:00 p.m. U.S. Central Time (CT) each day.
Modelling the curve
In normal conditions one would expect the rates of overnight TIIE funding to fluctuate in a range near to the current policy rates. This gives the curve and anchor point. If the current month does not contain a Governing Board meeting, we might expect overnight rates to be relatively similar throughout the month and for the price of F-TIIE futures to reflect this. In a month where there is a meeting, the price of F-TIIE futures may not be the same as the prevailing overnight rates and this can be indicative of expectations of monetary policy change.
Comparing F-TIIE prices prior to a meeting date with those after we can determine what probability the market is placing on expectations for a Central Bank policy change at the meeting in between.
Let us work through an example. First, we note the dates of Central Bank of Mexico meetings in 20241:
The Central Bank of Mexico moved policy rates down from 10.50% to 10.25% at their meeting on November 14. If we review a sample of F-TIIE rates around that time, the effect is clear. The change of policy affects rates from the day following the meeting:
Looking at the F-TIIE contract forward curve, observing on December 3, 2024:
Source: CME Group
We can see from the table above that the prices of F-TIIE futures potentially indicate a market expectation of a downward trend in interest rates between December 2024 and January 2025 of 19 basis points from 10.23% to 10.04%.
More precisely, when looking at January, the implied average in the preceding month’s daily publications of F-TIIE rates were at 10.23% and we assume this level of rates prevails (again on average) until a policy change on January 9, 2025.
Hence, we can model the month of January as being nine days of 10.23% plus 22 days of a lower rate that will return the value of the futures price of 89.96 or 10.04%.
Stated another way we have the following:
Rearranging for x:
x = 9.96%
Thus, we now have average F-TIIE rates prior to the Central Bank meeting at 10.23% and average implied F-TIIE rates after the meeting at 9.96%, indicating an expected change of 27bp rather than 19bp indicated by the simple spread of prices between futures.
If we further assume that rate moves are in increments of 25bp we can express the probability of a hike or cut as the calculated spread/25, here the simple calculation would imply 19/25 = 76% probability of a rate cut, whereas the more precise calculation would imply 27/25. This can be interpreted as a 25/25, or 100% chance of a 25bp rate cut, and a 2/25, or 8% chance of a 50bp rate cut.
How to trade this scenario?
In the previous section, we saw how to accurately measure the probability of rate changes implied by market prices. Once we have that measurement, we may want to hedge or manage risk for a different outcome. If you wanted to protect against rates moving on an unchanged policy or simply disagreed with the market pricing of implied rates after the Banco meeting, you may want to buy contracts that expire further out.
Traders can capture the spread between December 2024 and January 2025 F-TIIE futures by speculating on whether the implied 25 basis point rate cut is overpriced or underpriced. If they believe the market is overestimating the size of the coming rate cut, they could buy December futures and sell January futures. If December futures prices rise, and January futures fall, then the trader profits from the compression of the spread.
Conversely, if traders believe the market is underpricing the rate cut, they might sell December futures and buy January futures, expecting the implied spread to widen further. This approach assumes a steeper cut, with December futures losing value as their implied rate remains high and January futures gaining value as their implied rate reflects a deeper cut. In both scenarios, the profitability hinges on accurately forecasting the Banco’s monetary policy action and timing the adjustment of market expectations.
Conclusion
Our F-TIIE futures provide a straightforward way for market participants to try and protect themselves against risks associated with changes to Mexican interest rates or to take a speculative view of potential policy changes.
Housed alongside our market-leading U.S. fixed-income franchise, the F-TIIE contracts should also benefit from margin offsets that increase the efficiency in capital terms of trading the Mexican F-TIIE.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
