The season-ending event began on Sunday (12 November) as Federer got off to a winning start, beating American Jack Sock 6-4, 7-6.
Following the win, the world number two was asked about Nadal's suggestions that the ATP Finals should be played on clay.
The Spaniard had in the past complained that it was not fair for him to play on the indoor surface, citing it as one of the reasons why he is yet to win the event.
"I believe that it's not fair that a player like me really never played on a surface that was a little bit more favourable," Nadal said in November 2015.
"I always played on the worst surface possible for me."
Federer, however, believes it is completely fair, saying that there are not many Masters 1000 events on other surfaces besides clay.
"Fair'? I'm not sure if it's the right word," Federer said, as quoted on Metro. "But I think it's right and fair that it's indoors, as well."
"There is no Masters 1000s on grass. There is one Masters 1000 indoors: Paris. So I feel like indoors also deserves its place, you know.
"Could it be switched up to clay once in a while? Yeah, maybe. Could we have more 1000s on grass? Yeah, we could have that, too. Could we have less on clay, more on hard courts? Yes, it's all debatable.
"I think it's not the time of the year for clay, so there you have it. You can do indoor clay, I guess, but that's a bit silly. 'But I get his point, and it's a fair point.'"
Nadal will face David Goffin on Monday (13 November) as the Spaniard seeks to win his first-ever ATP Finals and end what has been an already successful year on a high.