Administration Department, ITAM
By: Renata Herrerías

Today we cannot understand the world of investments without financial innovation. Organized markets and financial intermediaries constantly propose new alternatives to meet investment needs, risk management and financial resources management of governments, companies and individuals. In fact, intermediaries and financial markets exist, among other reasons, so that participants can redistribute their risk among those who are willing to take it.

Like technology, the evolution of the organized financial markets was relatively slow during the first 70 years of the 20th century. Until that time, it was only only possible to trade debt instruments (bonds), equity instruments (shares) and futures contracts subscribed mainly for agricultural raw materials. In 1972, the Chicago Board of Trade (or CBOT) launched the first financial futures contracts, which had underlying currencies setting the bid and ask exchange rate with the US dollar. A few years later, it began to trade interest rate futures. Also in the early 1970s, the Chicago Board Options Exchange (CBOE) began offering options on stock of 16 companies.

In Mexico, the organized derivatives market, as it is known today, was conceived in 1994 and materialized in 1998. Created by the Mexican Stock Exchange (BMV) and the S.D. Indeval, the Derivatives Exchange (MexDer) began operations in December 1998 with futures on US dollar.

Derivatives are financial instruments whose value and risk depend on another asset (underlying asset). For example, a call option is a contract that gives the investor the right to buy a certain asset at a certain price at a future date. By acquiring that right, the contract owner is willing to pay a premium in advance (call price). The price of the option depends on the time of expiration of the contract and the uncertainty about the evolution of the price of the underlying asset and interest rates. If the contract gives the investor the right to sell the underlying asset, then it is called a put option. The popularization of the use of derivative instruments and the search for options for hedging and investment mechanisms have resulted in the impressive development of markets and non-conventional financial instruments.

From a Price Model to a Volatility Indicator

In 1997, the Nobel Prize in Economics was awarded to Robert Merton and Myron Scholes for their method of determining the valuation of a stock option (which they developed with Fisher Black, who died in 1995). The method they proposed gave way to the creation of new instruments, as well as new mechanisms to determine the economic value of many other assets such as insurance contracts, guarantees and flexibility in an investment project. Black and Scholes presented their options pricing formula (later called “Black-Scholes”) in an article in 1973.

Before the Black-Scholes formula, the main problem in determining the theoretical value of an option was to know the attitude of the buyer of the option toward the risks he/she would run. A “very” risk-averse investor would be willing to pay more to eliminate it than a “less” risk-averse investor. The most important contribution of Black and Scholes is that in their method it is not necessary to know the attitude of the investors because the “risk premium” is included in the price of the underlying asset. That is, the risk is reflected in the evolution of the price of the underlying asset (in this case, the stock) and the price of the option depends on the expected price of the asset at the maturity of that option. The method starts from the possibility that a risk-less portfolio can be formed, because from the first moment its final value is known. The investor who has an option knows at what price he could buy or sell the underlying asset at the expiration of the option.

The variables of the Black-Scholes formula are the time to maturity of the option, the current price of the stock option, the risk-free interest rate, the exercise price¹ and the volatility of returns of the underlying. The last variable represents a challenge to value the option. Volatility refers to how much the stock’s price changes from one moment to another: the “more volatile” the return of an asset is, the less is known what the price and the returns will be in the future. The main problem is that if the option gives the right to buy and sell the stock at a future date, the volatility to consider is the one between the time of purchase and the time to expiration. Obviously, we cannot know the future and, therefore, we cannot know what the volatility of the stock’s retunr will be at the expiration of the option.  It is the only unknown variable in the Black-Scholes formula.

There are many stock options underwritten on other underlying assets that are traded in organized markets and of which the market price is known. Although we cannot know the future volatility of a stock’s performance, we can know the market price of the stock options. If we know the market price of the call and put options, solving the Black-Scholes formula for volatility could infer the volatility expected by the investors during the lifetime of the option. The volatility of the yield of an asset that is congruent with the quoted, or market, price of an option over the asset is known as “implied volatility.” If we know the option price, time to maturity, exercise price and interest rate, we can obtain information about the investors’ opinion about the future volatility of the yields of the underlying stock of the option. It is considered an ex ante measure of the perceived risk of an asset.

Latané and Rendleman (1976) had the idea of calculating the volatility with the

Black-Scholes formula. Since then, numerous studies have been written in which the implied volatility has been used, especially as a parameter that provides market information.   From being an equation to estimate the price of an option, the Black-Scholes model became a formula for calculating market expectations about future stock volatility.

The Volatility Indexes

In 1993, the CBOE introduced a volatility index, the VIX. Market indexes, such as the IPC in Mexico or the S&P500, provide information on the performance of shares in the market. They are representative indexes that indicate if at a particular moment the prices of shares rose or fell. The difference is that the VIX measures the expectation of volatility (uncertainty) of stock returns. The VIX is calculated from the implied volatility of the options on the S&P500 index. While the S&P500 is an index that measures the stock returns of the 500 largest and most tradable companies in the United States, the VIX represents the future volatility of those stocks that investors expect. Since the S&P500 is an index that represents market performance very well, the VIX accurately measures the expected volatility of that market ². Graph 1 shows the evolution of the VIX since 1986. Although introduced in 1993, the index was estimated since 1986 to cover the market crash of October 1987. The intention was to document the degree of market anxiety during the worst drop in the market since the Great Depression.  This would give a framework of reference for measuring the magnitude of other cases of turbulence. Had the VIX existed when the stock market collapsed in October 1987, it would have reached its all-time high of 150 points. Since the appearance of the VIX in 1993, the highest level it has reached was in October and November of 2008, during the worst of the subprime mortgage crisis in the United States (80 points). At other times of turbulence, but less deep, the VIX tends to reach 30 or 40 points, while in normal times it is between 10 and 20 points.

The Purchase and Sale of Volatility

Being indexes, the VIX and VIMEX cannot be bought or sold in the financial markets; however, as with return indexes, there are derivatives and structured products that to trade in accordance with the expectations of the investors. In fact, one of the objectives in creating the VIX was to have a volatility indicator on which options and futures could be subscribed.

The CBOE offers options and futures on the VIX. How do futures and options on volatility work? For example, a long position (buyer) in a futures contract has gains when volatility increases. Suppose an investor suffers losses when market volatility increases; therefore, he wants to hedge against increases in volatility. The investor buys 100 futures contracts maturing in June 2017. The exercise price at the time of purchase is 13.0. The contract has a multiplier of 1,000 dollars, so the investor makes a hedge on 1,300,000 dollars (100 x 1,000 x 13). If the volatility index rises to 14.5, the investor will have a gain of 150,000 dollars (= 100 x 1,000 x (14.5 – 13.0). Conversely, if the index decreases to 12, the investor will lose 100,000 dollars (= 100 x 1,000 x (12.0 – 13.0). Graph 2 shows the gains or losses that the investor would have as the value of the VIX changes over the life of the contract. Futures contracts and other structured products subscribed on volatility indexes, allow investors to hedge their portfolios in times of uncertainty. With this type of strategies, the direction of market movements are not relevant because investors can hedge regardless if the market goes up or down.

Graph 2. Example of a transaction with a VIX futures contract.

A frequently asked question is why the vast majority of individuals who have access to the Mexican financial system channel their savings to instruments or short-term vehicles that offer low yield savings options in the long term. Even though the habit of saving money exists, they do not opt for vehicles that allow them to achieve better medium or long-term goals.

To Rudiger Dornbusch, in the modern theory of consumption, income and savings, the latter plays a critical role in the life-cycle hypothesis, as individuals plan their consumption and savings for extended periods, with the intent to distribute their consumption throughout their lifetime. ¹ The life cycle theory links the habits of consumption and savings to demographic considerations, especially the age of the population. Individuals accumulate savings during the working stage of their lives and then, when their ability to earn an income starts to decline, they begin the stage of “dissaving” or “dis-accumulation,” in which they spend more than they earn and have to use their savings.

On the other hand, individuals are impatient and prefer to spend rather than save for the future. Under these conditions, they should set a goal on their desired level of wealth. The economist Christopher Carroll says that the goal or level of wealth is the point at which impatience is balanced with the motivation to save as a precaution. If wealth is below the target, the motivation for precautionary saving will be greater; if wealth is greater than the goal, impatience is stronger and the individual does not save.² Dornbusch also notes that interest rates or the returns on savings play a key role in the so-called substitution effects, from what follows is that as higher interest rates make future consumption more attractive, they end up generating a permanent increase in income and stimulating consumption.³

If we project this to Mexican savers, we see that allocating the available resources to more profitable and efficient vehicles would represent greater well being in the future, although in the present the amounts saved may be less. The endogenous growth theory, incorporating the variable of savings to the neoclassic theory, highlights several opportunities for the growth of physical capital and knowledge. The idea of increasing investment in knowledge is key to linking higher savings rates to higher rates of growth. In this model, savings are intended to increase capital reserves assuming that the population growth is constant and that capital does not depreciate. Therefore, the higher the savings rate, the higher the growth rate of output and per capita income, i.e., the economic welfare of each individual in the economic system.

Voluntary savings of individuals is concentrated in the financial system, mainly in the traditional banking vehicles, with interest rates that do not generate a real interest, that is, that do not exceed the levels of inflation. However, the penetration of investment companies or investment funds has grown significantly in recent years. These products have a high concentration in fixed income funds or very short-term debt with immediate enforceability, to levels that reach 70% of the total investment funds.

Why are these savings in long-term products not more diversified? It does not seem to make sense when compared to the results of having invested in an investment fund that mixes different alternatives between fixed and variable income. However, it is premature to draw this conclusion, as the reasons behind this behavior are very diverse, from the lack of knowledge or financial literacy, to the perception of risks, distrust or the fear of returning to cycles of economic crisis. Although they happened several years ago, these crises remain in people’s memory.  Individuals make their decisions based on available information, and it seems that a big task ahead is the promotion of financial literacy, which is not only the responsibility of the consumer of financial products, but also market participants and the authorities. Among market participants, entities that provide all these services fail to explain clearly and simply the benefits of investment funds in another asset class or long term, demonstrating that they have not deepened the customer’s knowledge. With regard to the authorities, they should direct their efforts to promoting financial literacy campaigns and training schemes of the most basic, which means including these items in the official educational programs.

In recent years, the country has made progress in the convergence of the main macroeconomic factors and it has been found that whoever made long-term decisions obtained returns that were higher than those who opted for traditional products.

In Mexico, the indicators of financial savings measured as a percentage of GDP show a positive evolution, although they are still far from those of similar economies. Compulsory savings channeled to the SIEFORES (Sociedades de Inversión Especializadas para el Retiro) managed by the AFORES (Administradores de Fondos para el Retiro) represents about 14% of GDP, while voluntary savings allocated in investment funds or investment companies amounts to almost 12% of the same indicator.

To understand the phenomenon of savings in inefficient vehicles in real terms and how it contributes to the generation of wealth of households and individuals, let us turn to macroeconomic theory.⁴ The value of financial savings channeled through the Mexican financial system can be defined as the balance between the financial assets and securities in the hands of individuals and of corporations (both residents and foreign) that are intermediated by regulated financial institutions in Mexico in order to be directed through financing to the private sector, the public sector or the external sector. The total financial savings is defined as the sum of the internal and external financial savings. The latter includes those securities issued in Mexico that are in the hands of non-residents, credit from abroad received by the Mexican public and private sectors, and the securities issued by these sectors in external markets.

The Mexican financial system has undergone a series of changes over the past 15 years which, together with the changes in the macroeconomic order, have laid the foundations for generating vehicles and sources of savings that constitute a long-term solid base of funding for the needs of the various sectors of the economy and that improve the welfare conditions of individuals. According to the most recent indicators, the evolution of financial savings has been favorable. This trend highlights the vehicles called SIEFORES, which are a compulsory contribution, and the societies or investment funds, which sell various market entities. The annual compound rate of growth in real terms of these two vehicles is 16% and 15%, so they are the fastest growing instruments in the last decade. In 2000, these vehicles accounted for just 2% of the total financial savings and are now at 14% and 12%, respectively.

While the penetration rate of financial savings to GDP is lower compared with other countries (Brazil, 78%, Chile, 94%), this indicator has increased in recent years. Among the factors that have led to this improvement are macroeconomic, structural and public policy changes, such as the following:

• Macroeconomic convergence

• Convergence toward the inflationary target set by the Bank of Mexico
• Stability of nominal interest rates
• Exchange rate stability

• AFORES (1997)
• Investment companies) (2001)

Macroeconomic convergence is based on three major closely related variables: the level of inflation, interest rates and the exchange rate, which have brought stability to the population. However, on the other hand, this change has been rapid and a large part of the population has not changed their savings habits. In previous decades, especially the 1970s, 1980s and 1990s, most of the individuals involved in the financial system placed their savings in traditional banking vehicles, all very short term, given the economic circumstances of the country. In other words, the same fragility of the system did not allow the opening of a longer-term horizon. However, although the economy stabilized after the crisis of 1994-1995, individuals still allocate their resources in short-term investments with immediate availability or high liquidity.

The structure of interest rates is used as a reference to indicate this radical change in their conditions and levels in the last 10 or 12 years, because in the late 1990s the one-year CETES were the longest fixed rate instrument of the system. In the years following 2000, there was a significant drop in benchmark rates and inflation, which led to an offer of government securities for periods of three, five, ten, twenty and thirty years, which had the effect of widening the market for debt instruments generated by the demand of the nascent private pension system and by the emergence and the widespread growth of voluntary savings through vehicles such as investment funds.

The changes to the Investment Companies Act, approved in 2001, have helped to modernize and adapt these vehicles, which have advantages over other alternatives such as voluntary savings collectors. Thus, we have seen that even new figures emerge in the distribution and services to the saving public. In addition to transparency and clarity, one of the most important changes in the law is the generation of new products (different classes or series of shares in each fund) and the new possibility to acquire other types of securities or assets, as in international markets.

There has been important and profound progress, and the groundwork has been laid so that savings vehicles, other than the traditional banking channels, become part of the alternatives. However, there are pending issues that should be included in the government programs that encourage the development of these long-term instruments so that households and individuals generate wealth in real terms. Among the factors to be considered include the following:

Education and financial diffusion

The benefits should be part of frequent and mass communication programs by the government in its capacity as the regulator of the financial institutions that serve the Mexican market. Participants must assume their responsibility of expanding the coverage of the supply of products according to the needs of the market.  It seems that this offer is directed at only certain segments and certain interests. How many times have we seen an advertising campaign aimed at long-term savings and its benefits?

Long-term tax benefits

A pending task in economic policy is the granting of long-term tax benefits that are clear and with legal certainty.  For example, the solution to the problem of the low tax base of the Mexican economy could be linked to a program that fosters long-term savings.

Footnotes

¹ Rudiger Dornbusch, Stanley Fischer y Richard Startz, Macroeconomía, México, McGraw-Hill, 10a ed., 2009, p. 321.

² Ibíd., p. 329.

³ Ibíd., pp. 78-84.

⁴ Robert J. Barro, Macroeconomics, Hoboken, John Wiley & Sons, 1984, pp. 151-173.

Bibliography

Dornbusch, Rudiger, Stanley Fischer and Richard Startz, Macroeconomía, Mexico, McGraw-Hill, 10a. ed., 2009.

Barro, Robert J., Macroeconomics, Hoboken, John Wiley & Sons, 1984.

“Ahorro financiero y su intermediación en México 2000-2010″, Notas Técnicas de la CNBV (NT/01/2010), Dirección General de Estudios Económicos-CNBV.

“Información estadística del mercado de sociedades de inversión”, Series AMIB (Asociación Mexicana de Intermediarios Bursátiles), consulted at www.amib.com.mx

“Información estadística”, Carpeta de Sociedades de Inversión CNBV-Portafolio de Información, consulted at www.cnbv.gob.mx

Introduction

The imperfections of financial markets, such as taxes, asymmetric information, the risk of bankruptcy, and transaction costs, reduce economic efficiency and thus impair the welfare of society as a whole. Financial derivatives, consisting of forward contracts, futures, swaps and options, have served to increase this economic efficiency in the financial markets by allowing, among others, a better management of financial risks, as well as structuring a relationship between risk and return that is more appropriate to the idiosyncratic needs of each participant, both in investment and in financing.

This article focuses on finance options and examples of how the authorities of the sector have justified a greater regulation of derivatives. Examples are specifically related to the fall of the New York Stock Exchange (NYSE) on October 19, 1987, an event known as “Black Monday.” The regulators ended up blaming mainly the derivatives market of Chicago and not the New York Stock Exchange, when it was actually Wall Street itself that prompted it. On that date alone, the New York stock market fell 508 points, which corresponded to a drop of 23%, the maximum that had ever been recorded in a single day of operations.

Although there are different reasons why an investor might use financial derivatives and, in our particular case, options, The Economist classifies them in five groups: 1) manage risks to reduce or eliminate some, but not others; 2) reduce or eliminate the risk of an asset losing value; 3) take advantage of possibilities for arbitrage, to profit without the associated risk; 4) obtain additional income through the sale (short position) of a put option, taking advantage of an investment (long position) in the underlying asset; and 5) take a leveraged speculation, i.e., try to magnify a gain, for example, to speculate on the appreciation of a common stock or a stock index, by taking a long position in a call option on any such stock or index, paying therefore only the option premium, rather than directly buying stock or the portfolio of stocks that would replicate that index in the stock market, paying the full value of each.

It is important to highlight this fifth and last reason, because it does not exonerate the derivatives market for the fall of October 1987, which became the mechanism that increased losses on the New York Stock Exchange through what is known as “portfolio insurance.”

Basis for the Regulation of Financial Markets

George Stigler, a professor at the University of Chicago and Nobel Prize winner in Economics in 1982, proposed in The Theory of Economic Regulation, of 1971, which is considered a pillar of the modern theory of regulation, that there be a change in the focus of regulation, from a normative economy to a positive economy. Thus, this has involved not focusing regulation on the search for possible causes of failure of markets, such as monopolies, externalities and asymmetric information, but finding the recipients of the benefits and the recipients of the costs generated by a regulation of the markets. Stigler explained that the regulation comes from the very industry it regulates and its purpose is to benefit some industry participants.

Merton Miller, a professor at the University of Chicago and Nobel Prize winner in Economics in 1990, noted that, unlike other areas of economics, finance has not focused the key issues from a public policy perspective, so it has stressed positive economics rather than normative economics and, therefore, the field of market regulation. Professor Miller also has postulated that it is possible that the regulatory agencies are dedicated to very different objectives than those that they claim to serve.

The foregoing has been shown repeatedly in recent times, when it was revealed that some of the key players in the regulatory entities in the United States came from Wall Street, and even more, once they concluded their professional activities in the public sector, they returned to Wall Street (with seven figure salaries, professional fees and performance bonuses). The name “revolving doors” has been applied to this collusion between regulators and the entities they regulate. This conflict of interest was also evidenced, for example, in Charles Ferguson’s documentary, Inside Job (2010).

Effects of Black Monday

Merton Miller wrote in “The 1987 Crash Five Years Later: What Have We Learned” that when recalling Black Monday, the fall of the stock market is usually specifically highlighted, without mentioning other financial instruments which are also listed in the Chicago Board of Trade (CBOT), such as the 30-year United States Treasury Bond in the futures market, an instrument that did not fall but, on the contrary, rose in value at the time. An even greater increase in the price of debt instruments occurred that day in the London market.

In the debt market, said phenomenon originated when investors tried desperately to get rid of their common stock to buy securities that offered greater security. Given this scenario, the net drop of value during Black Monday was much smaller than what public opinion thought. Something similar happened with other investment alternatives, such as real estate, which did not suffer negative consequences on that day.

Another of Miller’s arguments – corroborated by the research of Richard Roll of the University of California, Los Angeles, and showing the little understanding of what really happened on Black Monday – is that the crisis in the financial markets that was triggered in the NYSE, actually started that day, October 19, in Asia, with a significant drop in the stock market in the region, which spread to Europe, in particular to the United Kingdom, before the NYSE opened.

When this commotion that originated in Asia finally came to the United States, it happened simultaneously in the derivatives market of Chicago (CBOT) and the New York stock market. What is relevant is that the effects on the prices of financial instruments in both locations were asymmetric, because the CBOT and the NYSE had different microstructures: What is called “discovery” of prices in financial markets was much more efficient in the CBOT than in the NYSE. Thus, the price decline was greater in the Chicago market than in the New York market, where the continuous fall occurred with a delay.

The cause of this inefficiency in the price-discovery process on the NYSE is that this market has traditionally followed the objective of giving continuity to prices through participants known as “specialists,” who have had the power not only to stop operations once the auction floor bidding has already started, but also to delay the opening of operations while trying to obtain an opposite operation to reduce or cancel the initial exposure. However, since it was essential for the NYSE to report a price that Monday, as it did on any other day of operations, the last reported prices had to be those of Friday, October 16, which were higher than those on the following Monday.

The microstructure of the derivatives market of Chicago allowed the presentation, almost instantly, of the marginal price, i.e., the most recent price, while the NYSE, as a result of the powers of its specialists, smoothed out the common stock prices using moving averages that did not reflect the true fall.

At the moment when operations finally had to start that Monday, the delay in the opening of the NYSE caused a differential to appear with respect to the prices of Chicago, estimated at 7%, between the lower prices given by the CBOT futures market (price of 262) and the higher distorted prices  of the S&P-500 index of the NYSE (price of 282). This differential was particularly unusual, given that normally the futures price is above that NYSE index.

In addition, the reduction in the differential and the convergence of prices between the two markets tends to occur rapidly, but that October 19 it took about an hour and a half, and to complicate matters, the convergence was short-lived, as the representative prices of both markets distanced themselves again,  closing that afternoon on the NYSE with a record differential of 10% with respect to the CBOT. The reason was that the market for each of the common stocks that make up the S&P-500 index opened at a different time, so that its downward adjustment was gradual.

Allan W. Kleidon, then a professor at Stanford University, as well as other colleagues, showed that the fall of the NYSE was not caused ultimately by the derivatives market of Chicago, but by major shortcomings in the mechanisms and internal infrastructure that were operating in the NYSE. Since 1983, the NYSE was in the process of radically changing its infrastructure to an electronic registration system for buy and sell orders, called SUPERDOT (Super Designated Order Turnaround System), which was intended to replace the traditional system of paper ballots and phone calls.

However, in October 1987, the SUPERDOT was not yet functioning fully. Only market orders were operating, but not the limit orders, of which 80% still used paper ballots and phone calls. Therefore, the entry and removal of limit orders in the system was slow, produced bottlenecks and gave the misleading impression that the operations stuck in the system were not closed yet, but in fact many of those were already closed.

These different microstructures caused the erroneous perception that the commotion had started in the futures market of Chicago and spread to New York, where it brought down the prices. This unfortunate erroneous explanation was the mainstay of the Brady Commission, which was responsible for studying the fall in equity markets, to justify greater regulation of the derivatives market of Chicago.

Portfolio Insurance

Another angle of the justification given to strengthen the supervision of the U.S. regulatory authorities on the derivatives markets in Chicago, rather than concentrating it on the stock market of New York, is based on “portfolio insurance.”

Portfolio insurance used by the institutional investors and fund managers is a technique created by Hayne Leland, a professor at the University of California, Berkeley. It consists of creating a long position in a put option. This position is justified in that if the value of a common stock portfolio begins to decline as a result of a fall in the corresponding stock market, a financial instrument is required that increases its value with the fall, to compensate for the loss of value of the portfolio. On the other hand, if the price of the common stock begins to rise, unlimited earnings are sought by not limiting the portfolio earnings, except by a cost derived from the payment of the premium of the financial option. However, in 1987, there was no market of financial options on common stocks large enough to satisfy that requirement; in addition, the cost of the hedging instrument was very expensive.

In 1976, Leland had shown the financial markets how the long position of a put option on a common stock could by reproduced by the cloning of the option. This concept was applied in 1973 by Fisher Black and Myron Scholes, who published the formula for valuing options in the Journal of Political Economy. Coincidentally, a month before publication, the CBOT launched the first market of financial options, the Chicago Board Options Exchange.

To create this synthetic put option , the underlying asset is sold, in this case the common stock, and simultaneously, risk-free financial instruments are purchased, i.e., instruments of the U.S. Treasury. This pattern is repeated until the value of the synthetic option is equal to the value of the correspondingput option available in the market.

A serious problem with this strategy is that if the prices of the common shares in the secondary market (in this case, the NYSE) continue to fall, the value of a true put option automatically increases. The explication is that the option used as insurance is a clone of the true opotion available in the financial options market, so that if the price of the common shares fell, fund managers would have to artificially increase the value of the synthetic option. To meet this objective, more common shares are sold, and with the monetary resources thus obtained (long position), more instruments of the Treasury are purchased. It is obvious that this activity of the managers of large investment funds, such as the pension funds, created a vicious circle that magnified the fall of the NYSE. This was the main argument used by authorities of the financial system to justify increased regulation of the derivatives market.

It is fair to point out that the fall of the NYSE was facilitated by some of its major participants; what the incorporation of the portfolio insurance did was magnify the fall. The characteristic model of portfolio insurance postulated at that time that in response to a drop of 10% in the market of the underlying asset, i.e., of the price of the Standard and Poor’s 500 Index, 20 % of the shares of a supposedly secure investment portfolio had to be sold. The trading floor of the NYSE opened that Monday, October 19, with this strategy and since everything indicated that the market had already fallen 10%, it was urgent then to immediately sell 12 billion dollars in shares, as the total value of the market was 60 billion.

For portfolio insurance to work, the change of prices must be continuous, which means that the stock market must be very liquid at all times. However, since all the participants in the market who had secured their investment needed to sell their common shares, but the participants who had not implemented the insurance were reluctant to buy shares because of the uncertainty of those times, the New York Stock Exchange turned illiquid and, therefore,  portfolio insurance ceased to function as a protective strategy.

In addition, except in the extreme conditions of a globalized economic crisis caused by systemic risk, the losses of some participants are the gains of others, as in financial markets the concept of a zero-sum game also applies. Thus, not only in financial derivatives, but in general, the heavy losses perceived as financial disasters¹ have beenactually a simple transfer of wealth from some participants to others, with no damage or with minimal damage to society as a whole. In addition, financial derivatives are not always the cause of these problems, but they are also a consequence of failures in the controls established by the organizations that use them, in conflicts of interest, in lack of judgment and knowledge of some participants, as well as simple frauds.

Conclusion

Managing risks does not mean eliminating them. It is a question of separating the varied economic risks that affect businesses and governments, selecting those that these entities are willing to take and minimizing or eliminating the impact of the risks they do not want and that another entity is willing to absorb.

Many analysts have drawn a parallelism between the crises of the NYSE in 1987 and in 1929. This assessment is incorrect, because although in both cases there was great volatility, the 1929 crisis brought on the collapse of the banking system in particular and the economy in general, and it took several years for the markets to recover. The 1987 crash did not have these negative effects.

It is a difficult task to regulate financial markets because, among other reasons, they offer a participant the possibility of making huge monetary gains in a short period. Therefore, these markets attract the most prepared, brilliant and creative minds.

Unlike public opinion and participants in the financial markets, experts from universities and especially prestigious economists and Nobel Prize winners, agree that financial derivatives have not led to greater volatility and uncertainty in financial markets; rather quite the opposite. They have made the markets safer by allowing them to reduce and control both financial and business risks.

Recent history has shown that self-regulation of the financial markets is not the solution to the crises that have occurred in these areas. However, a lot of regulation has not been beneficial either, especially if the real cause of the problem is not tackled.

Footnotes
¹ Like those of Lincoln Savings and Loan (1991), Metallgesellschaft (1993), Orange County (1994), Procter and Gamble (1994), Barings (1995), Gibson Greetings (1995), Eastman Kodak (1995), Salomon Brothers (1995), Daiwa (1995), Sumitomo (1996), The Government of Thailand (1997), Long Term Capital Management (1998), Enron (2001), Tyco (2002), QWest (2002), WorldCom (2002) and Bear Sterns (2008).

References

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Kleidon, Allan W., “Arbitrage, Nontrading and Stale Prices: October 1987,”  Journal of Business 65, 4, October 1992.

“Cracking the Derivatives Case,” Fortune, March 20, 1995.

ITAM

In recent years, private equity (PE) funds have grown exponentially. According to the Mexican Association of Private Capital (AMEXCAP, for its acronym in Spanish), by the end of 2015 there were more than 140 funds in Mexico, with cumulative capital commitments since the year 2000 of more than 29 billion dollars. The sector has doubled in the past seven years, but it is still incipient, as it represents less than 0.1% of GDP, below countries like Chile, Colombia and Peru. In the United States, this figure is close to 1.3%, according to the Emerging Markets Private Equity Association.

According to numbers of AMEXCAP 43% of capital commitments have been invested in real estate funds, 35% in private equity funds, 15% in infrastructure funds. The remainder corresponds to venture capital funds and funds that invest in other funds. Part of this exponential growth is explained by the fact that since 2007, following a change in regulation, pension funds (known as AFORES in Mexico) can invest in private equity funds through dedicated instruments called development capital certificates (CKDs), and public real estate trusts (FIBRAS).

One restriction of the CKD is that 100% of the resources allocated must be invested in Mexico, which significantly reduces the number of private equity funds in which an AFORE can invest and increases the risk by having all private equity investment in Mexico. Most of the resources invested in private equity funds in Mexico come from foreign investors. This is because some of the funds are international and because there are local funds that have foreign investors.

At the end of July 2016, the AFORES had allocated more than 155 billion pesos to CKDs and FIBRAS (5.5% of the total resources managed). However, the growth potential is still high, as the pension funds can invest between 25% and 30% of the total resources in CKDs and FIBRAS (except the less risky pension funds, which may invest only 5% in FIBRAS). Because of the need of long term investment vehicles, the demand for this type of instruments by the AFORES is very high. Out of the total amount issued by more than 55 CKDs, the AFORES own over 80%. The AFORES are willing to invest more but supply is still limited.

Since the end of 2015, AFORES can also invest in private equity funds through a new instrument, known as Project Investment Certificates (CERPI, for its acronym in Spanish). The instrument is similar to limited liability companies LLCs that is the vehicle used by investors in the United States, Canada and some European countries to invest in private equity funds. The main difference is that in the CERPI the technical committee formed by investors is not required to approve the investments, since this power rests within the investment committee of the private equity fund, which is normally formed by the partners of the fund and their investment team.

PE funds are managed by a team of professionals who, thanks to their career and reputation, obtain resources from institutional investors, such as insurance companies, pension funds, foundations, sovereign funds, ultra-high-net-worth individuals, family offices, banks and other financial institutions.

In general, the intention of a PE fund is to invest and then improve the company during five years. After that they will try to sell it and get an internal rate of return between 25% and 30%, and a multiple over invested capital above 2.5 times. The fund may sell the company to a strategic investor (competitors, suppliers, etc.), to a financial investor (private equity funds, family offices, etc.) or to the public via an initial public offering (IPO).

The private equity industry can be divided according to the type of company in which the fund will invest.

1. Venture capital funds. They try to invest in recently created companies (startups). These companies have a high growth and high risk profile. Depending on the stage of development in which a company is, this sector can be subdivided into the following:

• Seed capital. They invest in an idea or project. Normally these companies have recently been incorporated and do not have a proven business model. Their income is very small or non-existent. Angel investors and online crowdfunding platforms are in this segment. The amount of the investment may be up to 500,000 dollars.
• First round or Series A. The amount of the investment is between 500,000 and two million dollars. In general, resources obtained are used to cover the operating costs of the next six to 24 months.
• Second round or Series B. The amount of the investment is between two and five million dollars. The objective is to obtain the resources to consolidate and grow a company. At this stage, the companies have already reached breakeven.
• Growth capital. This is the last level of venture capital. The investment amounts exceed five million dollars. The goal is to grow companies and improve their profitability.

2. Private equity funds. They invest in mature companies that are already established. The funds of this segment are classified in accordance with the investment strategy.

• Leveraged buyouts (LBO). A high percentage of debt is used to finance the acquisition granting the shares of the company and its assets as collateral. The idea is that for a period of between five and seven years the company grows and pays down the debt with the cash flow generated by the operation.
• Expansion capital. It is invested in companies that require resources to continue growing rapidly, either through acquisitions of other companies, with new products or in other markets.
• Distressed. It invests in companies that are going through a difficult time. Normally they carry out a financial and operational restructuring to avoid bankruptcy.

3. Real estate funds. Financing of real estate projects.

4. Infrastructure. Financing of projects such as power plants, roads, water, telecommunication, etc.

Private equity and venture capital funds help companies in which they invest to strengthen their competitive advantages by making the most of their financial, operational or institutional opportunities. Generally, the companies in which they invest benefit from better corporate governance, financial and operational analysis, accelerated value creation and improved decision-making.

In conclusion, the objective of PE funds is to create value in the companies in which they invest in order to generate attractive returns for their investors. This brings significant benefits to entrepreneurs, society and the government because it favors growth in companies, creates job opportunities, boosts the economy and by professionalizing and institutionalizing the companies it makes payment of taxes transparent, and strengthens the enforcement of labor, environmental and social responsibility standards.

References

AMEXCAP (2015). Capital privado y emprendedor. México, RiskMathics.

EY (2015). Estudio sobre la industria de capital emprendedor en México.

KPMG (2015). El impacto del capital privado para las empresas en México. 17 casos de éxito.

June 23, 2016, is considered to be a historic day. Citizens of the United Kingdom voted to leave the European Union, which has led to a series of analysis with respect to what will happen in the trade bloc and in the United Kingdom. This article examines the effect on trade, migration, regulation and tax contributions, which has an impact on the markets (products, labor relations and capital) and on the economy (production and productivity, jobs and public finances).

Introduction

Exports from the United Kingdom to the European Union accounted for approximately 55% of its total exports in 1999, but this percentage decreased to 45% in 2014. The United Kingdom receives approximately one tenth of the exports from the European Union. In addition, the United Kingdom is the fifth largest economy in the world and continues to benefit from a significant foreign direct investment which, as it is long-term, is unlikely to fall immediately.

The free movement of labor in the European Union led to a greater net migration to the United Kingdom than to other states of the EU in the last decade. In 40 years, the UK has experienced a significant increase in its population, about 15%, distributed in 40% by population growth, 40% by migration from outside Europe and 20% by migration from the European Union. Thus, according to the laws of free movement of the European Union, migration has represented an increase in the UK population of approximately 3% since 1973.

Being a member of the European Union has had very different effects on the structure and the magnitude of the regulations in the United Kingdom by means of legislative instruments.

From 2010 to 2015, the average gross contribution of the United Kingdom to the European Union was 16.8 billion pounds; however, the UK also received tax transfers from the UE in the form of public receipts worth approximately 4.4 billion pounds per year, which are mainly paid to the private sector, but are redirected by means of government departments of the United Kingdom. The country received a rebate based on the difference between its contributions and what it received. This means that the net UK contribution to the budget of the European Union during those years was approximately 8.8 billion pounds per year, or 0.5% of GDP (the net contribution of the United Kingdom in 2015 was estimated at approximately 8.5 billion pounds).

Between 2010 and 2015, the net contributions remained stable at an average of 0.5%. However, in 2009 the net budgetary contribution from the United Kingdom was much lower, at 0.3%. The increase in the following years was mainly due to the reduction of the rebates in the differential. The public sector budget of the European Union was approximately 4.7 billion pounds between 2009 and 2015.

Possible Effects of Leaving the European Union
Trade and Investment

There are a number of mechanisms by which the exit of the United Kingdom from the European Union may affect its trade: increase of trade barriers, increased non-tariff barriers, opportunity costs of subsequent reductions of non-tariff barriers within the European Union and the impact on future trade agreements with countries outside the European Union.

The exit of the United Kingdom from the European Union would cause it to run the risk of paying additional taxes or fees applied in other countries so that they can access other major European markets.

In some sectors, local regulations act as non-monetary barriers to cross-border trade. These non-tariff barriers are in addition to the costs of trade in goods and services. Non-tariff rates are the costs of crossing borders, such as the time devoted to revisions in customs and the management of imports and exports. These costs will rise when the United Kingdom leaves the European Union. According to Ciuriak (2015), cross-border costs will represent 1.2% of GDP in the United Kingdom if it fails to negotiate a favorable trade agreement after its departure. However, one should bear in mind that the characteristics of the non-tariff rates on goods and services differ significantly.

One of the main benefits of being part of the European Union market is that it has helped reduce non-tariff rates within the UE. For example, it standardized the regulations of the 28 member states to comply with a single set of rules. Therefore, non-tariff rates applied to the exchange of goods and services between the United Kingdom and the rest of the European Union can increase with the departure of the UK, due to the gradual regulatory divergence.

There is academic research that supports the fact that the costs of the non-tariff rates in trade are greater than the cost of the tariffs. Looi Kee, Nicita and Olarrega (2009) argue that, on average, non-tariff rates contribute an additional 87% to the trade restriction level imposed by tariffs. In a similar manner to the increases in tariffs, the increase in these rates would also elevate the costs of exports from the United Kingdom to the European Union.

Ottaviano and Peri (2014) estimate that the increase in non-tariff rates of the European Union and the United Kingdom will result in a reduction of GDP of the UK of between 0.4% and 0.9%, depending on whether it is able to negotiate a favorable trade agreement with the EU.

Foreign trade

One of the potential benefits of the United Kingdom leaving the European Union is that it would establish its own trade policy, independent of the interests of other member states of the EU. For example, it could make trade agreements with other major emerging economies or rapidly growing markets without having to negotiate as a trade bloc. Ciuriak (2015) emphasizes that a free trade agreement with the major economies of East Asia, including China, Japan, India and the Association of Southeast Asian Nations, would generate about 0.6% of GDP for the UK.

On the other hand, leaving the European Union means giving up the trade agreements that the EU has established with other countries. It currently has preferential trade agreements with 53 countries and is negotiating with another 72. Therefore, in practice, the UK would have to renegotiate 125 trade agreements.

Migration

Migrants from the European Union contribute to the UK economy by propping up the workforce, so that they have an important role in the economy and account for about 6% of the total active working population.

Migrants from the EU also tend to be younger than the native population. The average age of a migrant from the EU is 32.5 years, according to the statistics of 2011, compared with the average age of 40.8 years of British workers. In addition, migrants from the EU have lower levels of economic inactivity than the British.

Several studies have sought to understand the effect of migration on the economies and, in particular, on the labor markets. When migration increases the workforce of an economy, the possibility of increased economic output opens up. In the context of the EU economy, the free movement of labor within the European Union allowed companies to take advantage of a larger pool of workers. If the UK fails to retain the principle of free movement of labor, the immediate impact will be the reduction of the workforce.

There are still no solid estimates of the impact of migration on GDP of the United Kingdom after the departure, but a study by Di Giovanni et al. (2014) estimates that the recent reduction of international migration brought a loss of general social well being of the United Kingdom, which remained at less than 1.5%.

In general, economic theory does not predict any negative long-term effect. However, there could be several short-term results, depending on the economic context and the combination of skills of the workforce in sectors where migrants compete with native workers, i.e., where they are direct replacements in the market.

It is likely that there will be restrictions on migration both in the European Union and the United Kingdom. However, there may be conditions for migrants of the EU to continue working in the UK, with or without the status of permanent residence. In practice, this means that European migrants who are already in the United Kingdom could stay, while restrictions on future flows would be imposed.

Regulation

In the beginning, upon its departure from the European Union, the United Kingdom can revise or remove some or all of the regulations to which it has been subject. However, in some cases, the United Kingdom has introduced regulations that go beyond the minimal standards required by the EU, and it is possible that British lawmakers may not be willing to reverse these regulations.

An analysis of the politically viable regulatory changes in the United Kingdom due to its exit from the European Union points to a potential savings of 12.8 billion pounds per year. This is just a little more than the potential savings it would have in an extreme case without political constraints, in which the calculation of the annual savings would be 24.4 billion pounds.

A review of the regulations of the financial services notes that it is unlikely there will be major changes in many policy areas because the United Kingdom must adhere to international regulatory commitments in any event. Most EU regulations would continue to be applied in the UK, which would also make it possible to apply parliamentary or statuary proceedings so that they would be included or would remain within British law. Meanwhile, the guidelines that the application of national legislation requires will remain in force until they are amended or deleted.

Tax contribution

Upon leaving the European Union, the United Kingdom will no longer contribute to its budget, although that depends on the conditions of its departure. If the UK joins the European economic area like Norway, it would still have to make a contribution to be able to participate in this single market, albeit in a smaller proportion. On the other hand, if the United Kingdom negotiates a free trade agreement or does not pact a trade access agreement, it would not have to contribute to the European budget.

Conclusions

The decision has already been made: the United Kingdom will leave the European Union. From the date of the referendum, two years must pass before the exit from the bloc will materialize. There will be changes in trade, migration, regulations and tax contributions, and in some areas they could be drastic and change the position of the United Kingdom in the global economic context as well as establish precedents in labor relations and capital, production and productivity, employment and public finances, which would have an impact on the social sphere. It is a fact that not everything that was negotiated and established to be part of the European Union will be eliminated. However, it will have to be reconsidered, and this will change the relations not only of the United Kingdom with the European Union, but of each one inside and outside its borders.

Bibliography

Bank of England (2015b), “The impact of immigration on occupational wages: Evidence from Britain,” Staff Working Paper No. 574, December 2015.
Barrell, R. and Pain, N. (1998) “Real exchange rates, agglomerations and irreversibilities: Macroeconomic policy and FDI in EMU,” Oxford Review of Economic Policy, Vol. 14, pp. 152-167.
Department for Business, Innovation and Skills (BIS) and Home Office (2014), “Impacts of migration on UK native employment: An analytical review of the evidence,” March 2014.
Bloomberg (2016b), “The impact of ‘brexit’ on sovereign ratings for the U.K.,” February 2016.
Ciuriak Consulting (2015), “The trade-related impact of a UK exit from the EU single market,” April 25, 2015.
Deutsche Bank (2016), “The UK & EU: Exit Emergency,” February 2016.
Di Giovanni, J., Levchenko, A. and Ortega, F. (2014), “A global view of cross-border migration.”
McIntosh, S. (2013), “Hollowing out and the future of the labour market”, BIS Research Paper Number 134, Department for Business, Innovation and Skills, October 2013.
Office for National Statistics (2008), “Analysis of international trade and productivity, using the EUKLEMS database,” November 2008.
Open Europe (2015), “What if…? The consequences, challenges and opportunities facing Britain outside the EU,” March 2015.
Ottaviano, G. and Peri, G. (2005), “Rethinking the gains from immigration: Theory and evidence from the U.S.”

Development banks are instruments of economic policy of the federal government, which should have an impact on development when used properly. However, despite their financial soundness, they did not fulfill their mission, therefore new definitions and operational changes were required.

One of the objectives of the financial reform is to solve the problem that although the Mexican financial system has healthy financial intermediaries, the financing of companies and productive projects is very low. That is, the strengths of the Mexican financial system have not been reflected in development, and strategic sectors such as micro and small enterprises, agriculture, entrepreneurs, infrastructure and housing do not have sufficient access to credit ¹

Internationally ², prosperous development banks have been able to identify and mitigate market failures, and have complied with a well-defined mandate, using innovative financial instruments, care of their financial sustainability, and have adopted sound banking practices in in the field of corporate governance. Therefore, several measures are being considered in the financial reform to strengthen the Mexican banking system: redefining its mandate, relaxing its regulatory framework and setting measures to improve its operation.

Justification of development banks
The first theories of the financial systems stressed the role of the mobilization of savings to invest in productive activities that foster industrialization. Today we know that the functions of financial systems are much broader: They provide payment systems; mobilize savings and provide credit; monitor and ensure that the credit is used correctly; and limit, group and put a price on the risks.

An efficient financial system is a prerequisite for promoting economic development; however, there are failures in financial markets due to problems of information. The imperfections of the financial markets impede the proper allocation of resources, so that markets alone have no effect on the development that they desire.

The State has elements to compensate for market distortions, so normally its participation in the financial system is warranted. Levy et al et al.³ classify the case for State intervention in the banking sector into four groups: the need to maintain the safety and soundness of the banking system, the need to overcome the problems of asymmetric information, the need to finance projects that are socially valuable, and the need to promote financial development..

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The existence of development banks is justified by three of these four reasons: 1) it contributes to overcoming the problems of asymmetric information, which facilitates the access to financing, for example, of micro and small enterprises; 2) it finances socially valuable projects, such as major infrastructure works and sustainable projects; and 3) it offers efficient banking services.

The importance of State intervention is not the degree of intervention in itself, but its quality. The role of development banks in the financing of development is to serve as a catalyst, that is, to accelerate the efficient allocation of resources. At the same time, its intervention should not generate inefficiencies in the financial markets.

The manner of operation and the instruments of development banks depend on the market failure that one wants to remedy. It is not a matter of deciding whether a bank is first-tier or second-tier, but what are the appropriate instruments to comply with that mandate, as it may be first-tier, second-tier or mixed.

In carrying out their functions, development banks are at risk, which inevitably has an impact on their financial structure. Thus a circle is closed: The bank tries to have an effect on development, it manages the risk appetite and through an appropriate bank management it takes care of financial solvency.

Mandate of development banks
Development banks finance valuable projects for society that do not interest the private sector because they are not very profitable; that is, the private sector has few limited incentives to finance projects that produce externalities.

Rudolph⁴ believes that the mandate of development banks should cover the sector to meet the rules of cooperation with the private sector and minimal levels of efficiency. This consideration is complied with in Mexico, as each sector attended by a development bank is defined by a market failure. The role of development banks is complementary to that of the private sector. The Basel regulations are applied to this banking in regard to the amounts of capitalization to ensure its efficiency and financial stability.

The National Financing Development Plan 2013-2018 ⁵ stipulates that development banks are “institutions that carry out the service of banking and credit, subject to the priorities of the National Development Plan, and in particular the National Financing Development Plan, to promote and finance sectors that are mandated in in the organic laws of those institutions.”

In Mexico, the sectors in which a market failure occurs and which require a development bank are agriculture, ⁶, housing, infrastructure, exports, and micro and small enterprises, in addition to the lack of savings instruments for certain groups of the population. The table presents the development banks7 that operate in Mexico and their objectives:

	Institution of development bank	Objective
	Banco Nacional de Comercio Exterior, S.N.C.	To promote and finance foreign trade. To ensure efficiency and competitiveness of foreign trade in the stages of pre-export, export, import and replacement of goods and services.
	Banco Nacional de Obras y Servicios Públicos, S.N.C.	To finance or refinance public or private projects of investment in infrastructure and public services, and help the institutional strengthening of the federal, state and municipal governments.
	Banco del Ahorro Nacional y Servicios Financieros, S.N.C.	To promote savings, financing and investment among members of the popular savings and credit sector; to offer financial tools and services, as well as channelling financial and technical support to encourage the habit of saving and the development of the sector and, in general, national and regional economic development of the country.
	Nacional Financiera, S.N.C.	To promote savings and investment, such as channeling financial and technical support to industrial development and, in general, national and regional economic development of the country.
	Sociedad Hipotecaria Federal, S.N.C.	To promote the development of primary and secondary markets for mortgage lending, through loans and guarantees for the construction, adquisition and improvement of housing, preferably for low income families. To increase production capacity and tecnological development related to housing.

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Summary
Financial reform starts from the supposition that it is essential to modernize development banks to transform them into a useful tool to strengthen the country’s economy.

The existence of development banks is justified because of the failures of the financial markets.

In Mexico, the development banks serve a specific sector of the private sector in which there is a market failure.

Bibliography

Gutiérrez, Eva, P., Rudolph, Heinz, Homa, Theodore, y Blanco Beneit, Enrique (2011). Development Banks, Role and Mechanisms to Increase their Efficiency, Policy Research Working Paper. The World Bank.

Levy Yeyati Eduardo, Micco, Alejandro, y Panizza, Ugo (2004) ¿Es conveniente la banca estatal? El papel de los bancos estatales y de desarrollo. BID.

Rudolph. Heinz (2012). State Financial Institutions: Mandates, Governance, and Beyond. The World Bank.

SHCP. Programa Nacional de Financiamiento del Desarrollo 2013-2018. Government of Mexico. México.

SHCP (2013). Presentación de la Reforma Financiera y Exposición de Motivos del Decreto por el que se Reforman, Adicionan y Derogan diversas disposiciones que dan origen a la Reforma Financiera.

En términos simples, el capital privado se invierte en recursos en fondos, compañías o en proyectos no bursátiles a largo plazo

La mayoría de las estrategias de inversión de este activo se ponen en marcha mediante fondos creados por especialistas de distintas industrias o productos. Las características de las inversiones en capital privado están diseñadas para inversionistas calificados y con disposición a soportar poca liquidez, pérdidas y volatilidad de rendimientos, por lo que no son adecuadas para todos los portafolios de inversión, y al igual que cualquier otro activo, cabe la posibilidad de que no alcancen los objetivos esperados. Algunos riesgos de las inversiones en capital privado son su naturaleza especulativa, la escasez de un mercado secundario y la falta de información sobre el comportamiento y composición de las carteras. No obstante, recientemente el sector del capital privado ha sido impulsado, entre otros factores, por un entorno de tasas bajas de interés que aumenta el aliciente de los inversionistas por activos con mayores rendimientos, como el capital privado.

El rendimiento de las inversiones en capital privado ha sobrepasado notablemente el rendimiento de los activos tradicionales, como acciones y bonos, por lo que los inversionistas han buscado una combinación más diversificada en su estrategia de inversión, lo que incluye cada vez más inversiones en capital privado. No es mucha la correlación de las inversiones de capital privado con otros activos, por lo que su aportación a la diversificación de la cartera es alta, ya que reduce la volatilidad del portafolio en momentos de inestabilidad de los mercados bursátiles. Los atractivos retornos brutos que se esperan de este activo se encuentran, en promedio, entre el 15% y el 25% en pesos. El éxito de los fondos de capital privado que alcanzan este desempeño depende de la gestión de buenos administradores.

El primer gran auge del sector del capital privado, en el cual se produjeron transacciones con destacadas compañías, ocurrió en 1980 en Estados Unidos. Este auge fue impulsado por los incentivos fiscales sobre las ganancias de capital y por la eliminación de limitantes de inversión en capital privado para los fondos de pensión. Desde la década de 1980 se han creado numerosas empresas de capital privado, como Bain Capital, Blackstone, KKR, TPG y The Carlyle Group. Más adelante, la plataforma de inversionistas, compuesta inicialmente por familias de patrimonio cuantioso, se institucionalizó y se unieron fondos de pensiones, aseguradoras, fundaciones, banca patrimonial y fondos universitarios.

En México, la inversión en este activo por parte de las Administradoras de Fondos para el Retiro (Afores) se ha realizado mediante los Certificados de Capital de Desarrollo (CKD). Los CKD fueron creados por la Comisión Nacional Bancaria y de Valores y la Bolsa Mexicana de Valores (BMV) en 2009, con el fin de promover la inversión en infraestructura, bienes raíces y fondos de capital privado tradicional en México con recursos bursátiles. Además, se modificó el régimen de inversión para las Afores con la expectativa de que diversificaran sus portafolios, fomentaran el financiamiento empresarial, generaran empleos con su inversión en CKDs y ofrecieran a los trabajadores mejores pensiones en su retiro.

Operativamente, los CKDs son fondos creados como fideicomisos listados en la BMV. Emiten títulos que se adquieren en ofertas públicas, de la misma manera que se adquiere un bono o una acción pública en la BMV. A diferencia de otros activos que cotizan en la bolsa, los CKDs no se venden en un mercado secundario, es decir, los inversionistas que compran CKDs los conservan durante toda la vida del fondo. Los CKDs no aseguran un rendimiento definido; tanto el pago de principal como el rendimiento dependen únicamente del flujo de efectivo del fideicomiso, el cual se distribuye a los inversionistas tal como se distribuye un dividendo de una acción. Por lo regular, no se esperan repartos durante los primeros años de un fondo de capital privado, ya que las inversiones en proyectos o compañías tienen una vida promedio de cinco años. Los administradores de fondos que alcanzan sus objetivos de desempeño son los capaces de trazar estrategias adecuadas en las empresas o proyectos que seleccionan y los que además logran crear el valor suficiente para venderlas a precios que cumplan con los retornos esperados.

El sector del capital privado tiene dos estándares para medir el retorno de un fondo: la tasa interna de retorno (TIR) anualizada neta de gastos y comisiones, y el múltiplo del capital invertido. Los principales factores que determinan el rendimiento neto del fondo son los precios de entrada (compra) y salida (venta) de las inversiones, los dividendos entregados y los gastos del fondo. El retorno de inversión del CKD es resultado de la apreciación de capital de los proyectos; sin embargo, es complicado determinar si el desempeño de un CKD ha sido mejor que otro, ya que no hay una referencia o benchmark para hacer una comparación acertada, como se compara un bono o una acción con un índice. El rendimiento de las inversiones de capital privado solo se materializará si los administradores logran dar salida a una inversión.

Al 30 de septiembre de 2015 se han emitido 44 CKDs, con un monto acumulado de 89379 millones de pesos (sin considerar los compromisos de capital pendientes de los CKD fondeados mediante llamadas de capital, ya que inicialmente los CKD fueron fondeados con antelación). El primer CKD colocado en el mercado en 2009 fue el administrado por Red de Carreteras de Occidente (RCO), que, como su nombre lo indica, invirtió sus recursos en una red de carreteras de cobro. Sin embargo, el proyecto forestal de Agropecuaria Santa Genoveva (AGSACB 08) fue emitido en 2008 en formato de bono cupón cero debido a que aún no se creaba la regulación apropiada, pero se ha clasificado como CKD para términos prácticos. Los esquemas de fondeo iniciales de los CKD fueron mediante prefondeos de todos los compromisos de capital que los administradores buscaron por parte de los inversionistas. Hasta 2012 se permitió realizar llamadas de capital y el primer CKD con este esquema fue el administrado por GBM Infraestructura. La capacidad actual de inversión de los CKD emitidos (incluyendo AGSACB 08) está compuesta de la siguiente forma: 42% para inversión en infraestructura, 20% para bienes raíces y 39% en capital para inversión en empresas privadas. Las Afores más activas en este instrumento son Banamex, Sura y GNP Profuturo. En la Tabla 1 se muestra la composición de la emisión de CKDs en el mercado. Además, se estima que existen aproximadamente 9 CKDs que podrían representar 38000 millones de pesos en trámites de emisión en 2015.

Los CKDs han sufrido numerosos cambios regulatorios desde que salieron al mercado. Entre las principales modificaciones destacan las siguientes: i) se dejó de considerar a las inversiones en CKD para cálculos de valor en riesgo (VaR); ii) se introdujo el esquema de fondeo por llamadas de capital; iii) se permitió que los CKDs mantengan la inversión en empresas que pasen de privadas a públicas; iv) se requirió un análisis cada vez más profundo por parte de las Afores en este tipo de activo; v) se amplió el límite de inversión en CKDs; y vi) se permitió trazar estrategias de inversión mediante fondos de fondos.

A pesar de estos cambios, se ha reducido la emisión de CKDs en el mercado. La mayor parte de estos ajustes son para convertir a los CKDs en un complejo instrumento de inversión en capital privado. No obstante, quedan amplios retos para cumplir las expectativas iniciales, entre ellas, crear un círculo virtuoso en el Sistema de Ahorro para el Retiro y en la economía del país y seguir estándares mundiales en inversiones de capital privado. Actualmente hay iniciativas para adoptar mejores prácticas que se enfocan en los puntos siguientes:

Régimen de inversión

• Permitir que los CKDs realicen inversiones fuera de México para que las Afores expandan las opciones de elección de vehículos y administradores apropiados y se evite el incentivo a otorgar sus recursos a la gestión de administradores sin experiencia probada.
• Estimular a los equipos de inversiones de las Afores para que definan políticas de inversión a largo y mediano plazo con parámetros medibles de desempeño.
• Permitir que las Afores realicen inversiones directas en fondos o proyectos de capital privado.
• Exigir mayor capacitación a los equipos de inversión de las Afores para tomar mejores decisiones al momento de invertir en capital privado.

Metodología para cálculo de precios diarios

• Se determina intuitivamente un precio diario para los CKDs, ya que se trata de capital privado y son instrumentos públicos, al igual que con cualquier bono de acción. Sin embargo los CKDs no tienen un mercado secundario, por lo que su precio se basa principalmente en dos factores: el valor del efectivo que mantienen los fideicomisos y el valor de las inversiones que realizan. Esto crea un incentivo para que los administradores de los CKDs prefieran no revelar demasiada información a valuadores independientes, quienes por regulación deben publicar las metodologías y resultados de las inversiones de los CKDs, ya que no les favorece que los competidores de los fondos tengan acceso a esta información.
  Lo anterior también hace que los rendimientos calculados con base en los precios publicados diariamente por los proveedores de precios no refleje el desempeño real del fondo.

Uso de información

• Se hacen cuestionamientos sobre el manejo de la información privada para tomar decisiones por medio de órganos de decisión públicos en la estructura corporativa de los CKDs. La CNBV determinó hacer pública toda la información de los CKDs emitidos, lo cual ha afectado al mercado del instrumento, ya que la revelación de información a los inversionistas de CKDs es muy limitada, lo que aminora su interés y elimina el mercado secundario. Esto va en contra de la naturaleza del tipo de inversión, ya que en el resto del mundo se opera fuera del mercado público.

Aunque la regulación a la cual están sujetos los CKDs no los hace un vehículo óptimo comparados con estándares internacionales, es el único instrumento para que las Afores puedan invertir en capital privado. Es recomendable que en tanto los reguladores no fijen regímenes más apropiados y claros para maximizar el valor de los ahorros de los trabajadores, las Afores reflexionen sobre los resultados obtenidos hasta ahora con su participación en este sector. A medida que los inversionistas institucionales adquieran experiencia en el análisis de inversión de este activo y ajusten sus estrategias y lineamientos de inversión, se equilibrarán los beneficios de invertir en un horizonte de largo plazo con los incentivos correctos para los administradores durante la vida del fondo. En beneficio de los trabajadores, es importante que los gestores de sus ahorros no se enfoquen únicamente en obtener resultados de corto plazo y en determinar una estrategia de inversión en CKDs con base en su competencia, sino que dirijan esfuerzos a buscar y seleccionar los proyectos y administradores de fondos que mejor se ajusten a sus expectativas.

Con pocos antecedentes para un análisis y con grandes retos por delante, es importante reconocer que la emisión de CKDs ha hecho una aportación positiva al sector del capital privado en México, si se considera que se han colocado grandes cantidades de fondos como contribución directa al desarrollo de infraestructura, bienes raíces, crecimiento en niveles de utilidades y empleos en empresas privadas. Al mismo tiempo, se ha incrementado sustancialmente el valor de las compañías gracias no solo a las aportaciones de capital, sino también a la asesoría estratégica, operativa, financiera, comercial y legal, así como por los contactos comerciales y financieros clave.

Conclusiones

Los instrumentos de capital privado son nuevos en México, pero han permitido a las Afores mejorar el perfil de riesgos y rendimientos de sus portafolios.

A pesar de que ha habido cambios en la regulación para invertir en estos instrumentos, hay varios problemas que desincentivan las inversiones en capital privado. Una regulación óptima permitirá estimular no solo a las Afores para que inviertan en capital privado, sino también a los mejores fondos de capital privado para que realicen operaciones en México.

Las Afores deben hacer un esfuerzo por adquirir experiencia y conocimientos prácticos internos para poder alcanzar los estándares mundiales de capital privado y llegar a hacer inversiones directas, como los fondos de pensiones de Canadá y otros países más desarrollados.

México se encuentra en un momento histórico inigualable, en el cual las inversiones de capital privado pueden fomentar el crecimiento del país. Las reformas del sector energético impulsarán su desarrollo, la creación de las Fibras mejora la utilización de los recursos en el sector de bienes raíces y el Plan Nacional de Infraestructura necesita una inversión sin precedentes. Estos elementos han contribuido a que México requiera fuertes inversiones para capitalizar estas oportunidades.?

The role of the investment advisor has gained considerable importance in Mexico in recent years. The total amount of assets under management has actually quadrupled in the last decade.

This amount stood at 113 billion pesos at the end of 2013¹, distributed in more than 4,281 contracts with various institutions of the financial system on behalf of clients, who may be individuals, private corporations and pension funds, among others.

Although they are not intermediaries of the stock market, investment advisors are of such importance to the Mexican financial system that the National Banking and Securities Commission (CNBV, acronym in Spanish) recently incorporated them as a monitored sector.

As of January 2015, investment advisors are required to be registered with the CNBV, an important step in providing certainty and greater transparency to the market. Both individuals and corporations must meet certain requirements and provide information proving their honesty as well as a manual of conduct with standards and policies to resolve conflicts of interest, operational, financial and administrative information related to the provision of its services, certification before a self-regulatory body, and other relevant factors to exercise their advisory functions.

Investment advisers are individuals and corporations that on a regular basis provide professional portfolio management services, for which investment decisions are taken on behalf of and at the expense of third parties, investment advice on securities are offered, analysis provided and personalized investment recommendations are made for each client.

Unlike a representative who serves the public on behalf of a financial institution, investment advisors establish a link and receive direct payment from the investor in exchange for their services. Securities transactions ordered by the advisor are documented in the name of the client, who must have an account or brokerage contract with an intermediary authorized to perform operations on the Mexican Stock Exchange (BMV) and provide the advisor a mandate that empowers him/her to give instructions in their name, or to authorize him/her in the contracts concluded by the client with the intermediaries.

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The analysis that a client should conduct to choose and hire the services of an investment advisor is not limited to observing the historical returns that the advisor has generated from portfolios. The investor must primarily assess the transparency of the information provided by the investment advisor, paying attention to the scheme of remuneration and fees charged.

Investment advisors have various compensation schemes, although they generally charge a percentage of the value of the assets under management, AUM, for their services. Other common forms of compensation are fixed fees, hourly rates and commissions on securities traded under their advisory.

In addition, it is wise to check the following items:

• Experience and technical knowledge in the field of investments
• Certifications
• Authorization by the CNBV
• Major products and strategies
• Main services
• Sanctions and demands

The new regulation, along with the increase in information of the investment advisors and public statistics on this figure –nonexistent today– can help to reduce the information asymmetry and mitigate the agency problems that exist in this sector, as happens in many other contractual relationships. In this particular market, the client (owner of the assets) is the principal and the investment advisor is the agent.

The agency problems in this market are due to the client and the investment advisor having different interests, incentives, horizons, skills and information sets. In addition, the client has little capacity to monitor the advisor. Among the agency problems mentioned above, the two main ones are

• Adverse selection. Adverse selection occurs when the client is unable to verify the competencies of the investment advisor. The advisor has more information than the client.
• Moral hazard. Moral hazard occurs when the client cannot monitor the actions of the hired investment advisor.

Usually, there are several layers of intermediation between the investment advisor and the client, each with the potential to add conflicts of interest and commissions to the detriment of the interests of the client. To minimize agency problems and maximize shareholder value, the advisor can minimize the layers of intermediation and provide transparent information on potential conflicts of interest. Also, clients and investment advisors may enter into contracts or establish mechanisms to ensure that 1) the best advisors are willing to participate, and that 2) they are provided the appropriate incentives to work.

The best explicit contracts to mitigate agency problems are those that are based on results and that impose certain restrictions on investments –a way of defining the investment risk and universe– in accordance with the profile of each client. To some extent, the new regulation already addresses this last point. With the results-based contracts, the client and the advisor share the proceeds that are obtained. In a contract of this type, a fixed monthly or quarterly rate could be established and an additional bonus if the advisor reaches the goal, such as for example, a better performance than the benchmark index (setting an appropriate benchmark is very important and deserves further study). Another contract is that of relative performance, in which advisors are rewarded if their performance is superior to that of their competitors. With these schemes, if the investment advisor creates value for the client, that additional value is divided between the two in a kind of bargaining game.

In the particular case of clients who are individuals, Andrew Ang² suggests that the best payment scheme for the advisor is a flat fee or an hourly rate. This is because the relationships between the advisor and the individual have several dimensions (at a level that is not usually achieved with a financial intermediary) and the advisor provides a variety of services. When agents must fulfill several tasks or it is not possible to quantify them, the best contract is that of a fixed salary with the portion of variable compensation either minimal or non-existent, because to encourage them in one respect can demotivate them from performing other functions. An example of this is when clients need advisors who accompany them, listen and guide them on various topics that are not directly related to their investments.

In this sector, implicit contracts are as important as explicit ones in virtue of the fact that the reputation of an advisor is crucial to winning new clients and keeping existing ones. This ability to win over new clients by having a good reputation in the market is a strong long-term incentive because, as stated, it dominates the compensation scheme with a fixed percentage over the total assets under management.

Although concern over their reputation drives advisors to do their utmost in providing their services, it can also have distorting effects when these specialists invest in portfolios similar to those of their competitors or with little deviation from the benchmark index so as not to endanger their reputation if an investment strategy fails.

In conclusion, while clients know that there are conflicts of interest in this field, as elsewhere, what is important is that the advisor disclose potential conflicts and that contracts, structures and mechanisms are defined in order to mitigate and resolve them in such a way that the interests of the client are taken into account and value is created?

Bibliographic references

Ang, Andrew (2014). Asset Management, Oxford University Press.

Stracca, Livio (2005). “Delegated Portfolio Management: a Survey of the Theoretical Literature”. Working Paper Series No.520, European Central Bank.

Chevalier, Judith A., Ellison, Glenn D. (1995). “Risk Taking by Mutual Funds as a Response to Incentives”. Working Paper No. 5234 National Bureau of Economic Research.

Ley del Mercado de Valores del 30 de diciembre de 2005. Current text with the latest revision published on January 10, 2014.

One of the objectives of the financial reform is the reactivation of the financial market to make it grow. Starting with the diagnosis that there is a low level of financing to the private sector in Mexico – it is the country where there is the least amount of lending, despite having one of the most solid robust financial systems in the world.

The solution proposed by the reform is to grant more and cheaper credit, that is, to expand credit.

While the authority is right in that the financing to the private sector is low, several questions arise as to why it is low and how it should grow. The objective of this paper is to review the second question and propose a reasonable dynamic of credit growth in Mexico.

Credit is a double-edged sword. Used properly and responsibly, it can boost economic growth. When used recklessly and in excess, the result can be a financial crisis due to excessive borrowing by households and businesses. The financial reform has positive aspects, since it addresses an important issue. However, it is important to be careful with credit expansion, given the national and international experience. Reinhart and Rogoff, in their book This Time is Different, warn about the risks of excessive financial expansion:

“When a financial boom is based on debt, the result will almost always be a false positive image of public policy, of the ability of a financial institution to generate huge profits or of the standard of living in a country. Most of these booms end badly. Of course, the debt instruments occupy a pivotal place in any economy, ancient or modern, but to strike a balance between risk and opportunities of debt will always be a great challenge.”

Figure 1 shows that the total financing to the private sector is low compared to the average in different regions of the world. It is striking that even the Middle East and North Africa have a greater average financing penetration than in Mexico.

Figure 1
Total financing to the private sector in Mexico, 2003-2013
(Percentage of the GNP)

In Mexico, the low level of credit in relation to the GDP may be due to a number of structural factors of the Mexican economy. Although it is a relevant question, it is not the purpose of this text to research it.

The data shows that credit is growing in Mexico, as shown in Figure 2. Although there was a slight adverse effect because of the international financial crisis of 2008, the indicator shows a clear upward trend. This reveals that the financial system has not been inactive, so acceleration will occur, but in a responsible manner.

Figure 2
Total financing to the private sector in Mexico, 2003-2013
(Percentage of the GDP)

Figure 2 shows a clear upward trend from 2006 to 2013, with an improvement of nearly eleven percentage points of the GDP, from 19.66% to 30.60%. However, it has not been enough to reach the levels of other nations and therefore it is a big challenge for Mexico.

Financing for families and businesses, well used, can help the economic growth. However, irresponsible expansion causes problems for the economy because of over-indebtedness and generates risks for the macroeconomic and financial stability.

Reinhart and Rogoff (2009) explain that excessive debt, either by governments, banks, businesses or households, increases vulnerability in the face of a crisis of confidence, especially when the debt is short term. In addition, they document with ample evidence the banking crises. It is interesting that the outcome of these crises has equally affected, for many years, rich, developing and poor countries.

Figure 3
Total financing to the private sector, Thailand, Indonesia and South Korea in the Asian crisis
(Percentage of GDP)

Figure 3 shows the fast growth rate of credit just before the great Asian crisis of 1997-1998. From the graph, it is clear that it may not be long before we see another crisis in the area, if we analyze how credit has grown since 2002. Will economic history repeat itself? Only time will tell.

In an analysis of the balance of savings and financing in Mexico, the Foundation for Financial Studies (FUNDEF, acronym in Spanish) states that in 2013, the Mexican private sector banking system financed 73.65% of the projects from the private sector, individuals and companies, well above the development bank, which granted only 6.68% of the loans. Therefore, it is the private banks that financed investment projects in the private sector. This funding, together with the retained earnings, are the two main sources used by companies for new investment projects.

Credit expansion in Mexico has been responsible and it grew on average 2.8 times the country’s GDP between 2006 and 2013. It should continue having a responsible expansion of between two and three times the GDP to avoid repeating past mistakes. For example, one of the factors that triggered the 1994 crisis was the expansion of irresponsible credit.?

References

• Levine, Ross. 1997. “Financial Development and Economic Growth: Views and Agenda”, Journal of Economic Literature, vol. 35(2), pp. 688-726.
• Rajan, R. y Ramcharan, Rodney. 2011. “Land and Credit: A Study of the Political Economy of Banking in the United States in the Early 20th Century,” Journal of Finance, vol. 66(6), pp. 1895-1931
• Reinhart, C. y Rogoff, Kenneth. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press.
• Reinhart, C. y Rogoff, Kenneth. 2009. “From Financial Crash to Debt Crisis”, NBER Working Papers 15795, National Bureau of Economic Research, Inc.
• Sánchez J. y Zamarripa, Guillermo. 2015. “La situación del crédito en México: Perspectivas y recomendaciones”. Status report, FUNDEF.

When one starts talking about “digital strategy,” a cloud of ideas and concepts -often erroneous- is generated about what the organization must do to have a significant advance in the field of business.

The first line executive team must understand that a digital strategy is a method that uses the elements from the last generation to boost the business model and for the company to “do better,” either to do more business or do something more for the customers.

The technology component is definitely the master key of the world leaders of the moment. But you must first understand its impact and its benefits if you want to implement the strategy successfully. Primarily, technology should help the organization in a digital strategy to reduce costs.

According to a study by Accenture, nearly 90% of the companies in Mexico already have access to digital technologies, from social networks and blogs to cloud servers. The reality is that 60% of executives believe that they are not taking advantage of these technologies due to the lack of a comprehensive strategy.

Therefore, each day the IT director’s agenda becomes more important in the corporate boards for planning the executive strategy of the organization, which is responsible for the approach to the digital strategy toward the company objectives.

Businesses are entities that live in an ecosystem characterized by constant pressures and risks that must be closely monitored to measure emerging opportunities:

• Slowing demand
• Shortage of capital
• New regulations
• Erosion of assets
• Volatile prices

The pressures and unforeseen risks have an impact on the organization, causing a deterioration that is commonly expressed in two ways:

• CEOs eager to significantly reduce the cost of information technologies in order to ensure the efficiency of the area.
• IT staff fatigued by the cost-reduction initiatives and the impact of resolving contingencies, because generally they operate by reaction and will only deal with effects.

The challenge of high-performance organizations is to transform the pressures into opportunities by consolidating a cost reduction strategy based on technology in a sustainable way, while minimizing the associated risks.

Thus, among the first opportunities offered by new digital technologies are the following:

• Cost reduction in technological operation
• Cost reduction in the business operation

CURRENT CHALLENGES
From the start of the digital cost reduction strategy, the pressures of the company will begin to decrease through the alignment of all the units, but the changing market conditions must be taken into account. The technological area of the company is taken as the main objective of efficiency.

It is necessary to get the answer to certain considerations, which will begin to give a more comprehensive overview of the requirements:

• How is the total IT spending, both discretional and non-discretional, distributed?
• How does the IT spending contribute to the performance of the company?

Upon completion of this balance, we will begin to direct the actions toward cost reductions tailored to generate the greatest impact in the lowest number of moves possible.

ACTIONS WITHOUT STRATEGY
In the following three cases we see the most common actions undertaken by companies that do not have a digital cost reduction strategy:

• Case 1. Arbitrary cost reductions in the areas. For example, 10% cut in all IT budgets.
• Case 2. Exclusive consideration of projects of discretionary spending. For example, the cancellation or suspension of projects of significant investment.
• Case 3. Secondary cost reductions. For example, the elimination of suppliers.

When you do not have a strategic approach to cost reduction, there are no sustained and long-lasting benefits, but involuntary results that in many cases frustrate the achievement of the business objective, as set out below.

COLLATERAL DAMAGES TO THE ORGANIZATION
In these cases, it is common that collateral damages occur, which may include the following:

• Short-term savings, which are unsustainable over time, with new cost reduction initiatives without vision.
• Cost reductions that involve several consequences:
  • Reduce IT’s ability to sustain the business strategies.
  • Increase the gap of IT capabilities at the expense of future business expectations.
  • Undertake isolated efforts to reduce costs that do not translate into the desired cost reductions.

PROPOSAL FOR CHANGE
An approach based on the global experience of Accenture divides the reduction of costs into two large integrated perspectives:

• Reduction in IT costs from the internal IT perspective, which involves the costs directly associated with the operation of the technology and infrastructure.
• Reduction in IT costs from the external IT perspective, through continuous improvement of the business, maximizing efficiency and optimizing resources and processes.

The transformation of the manual processes of business to adopt digitized office initiatives, mobility and management of digital contents is found in this second part of the strategic vision.

MYTHS OF THE DIGITAL STRATEGY
It is understood that a digital mobility strategy does not consist in the following:

• Renting servers in a data center on your own.
• Establishing an integrated system that handles day-to-day operations.
• Making isolated applications in the companies.
• Being limited to publications on social networks, which is far from being a digital strategy.

The approach of organizations should focus on converting the problem of reducing the cost of technology into a pragmatic solution in the short and long term that has challenges from the beginning to the end when viewed from two perspectives of returns – the internal perspective of technological advances that favor agility and flexibility of the organization and the external additional reductions in the IT costs required by the business to maintain its competitiveness in the market.

At Accenture, we established a structural approach that helps to create a digital strategy for reducing IT costs significantly and sustainably. This strategy begins when you identify the key investments to obtain the savings that will bring productivity and gains.

In a scenario such as this, the main objective is not only to lower the cost, but also to change the nature of the expenditure to increasingly become dispatches of a “discretional” type, as they are now strategic, sustainable and of great benefits. A panorama is opened through discretionary spending that will create within the company an element that maximizes value in the context of the strategic vision.

NEW TECHNOLOGICAL TRENDS
Technological trends can also generate important cost reductions in the company. The most important thing is that all digital implementation is strategically aligned with the business model and the IT area. Let’s look at these trends.

• Social networks. Between 60% and 70% of the information that is generated in the company is unstructured data and is very valuable. The aim is to adequately exploit the interactions of social media to make better products, to provide more support to customers, to be closer to them and to win sales contracts. What was once seen as a game and entertainment, today companies exploit fully.
• Cloud. Another trend is an integrated vision of the use of technology through the cloud, such as collection and use anywhere for the whole team.
• Mobility. Mobility is everything in the future strategy. It is to take the company to any corner – not only an employee, a customer, a partner or a prospectus that is accessed at the moment you want and in real time.
• Massive and analytical data. The evolution of what was known before as business intelligence is the smart output of reports of data from transactional systems. In both cases, large volumes of information that is constantly moving are analyzed, and a scientific analysis that generates hypotheses about the behavior of information to generate predictions with very high precision is conducted.

With this methodology, the intention is to transmit the vision of the business to a multi-annual program of cost reductions, with elements of precise measurement to get the added value and true impact that must come from the IT area.

The short-term opportunities can generate reductions of up to 10%, but in the long term it could reach 60%, as shown in the graph.

The Accenture initiative is an end-to-end process that begins with workshops with strategic leaders of the digital business in an initial phase of diagnosis, which is then consolidated with the implantation and with a constant measurement.

The essence of Accenture’s digital strategy for the reduction of costs generates innovations in the business through unique experiences for the customer that include the new, intensive combinations of information, business resources and technology.

The success of digital business requires strategic decisions that recognize the pre-eminence of the customers in the business model and determine the difference between what is possible and profitable. The strategies generate a new value for the customer in ways that produce increasing incomes and high-performance results.

The concept referred to as digital technology makes information intensive and connected at the same time. To be a digital company, it is necessary to transform technology into business.?