Circular 2/2006 — Amends Circular 1/2002

CIRCULAR 2/2006
Mexico, D.F., August 16, 2006.
TO CREDIT INSTITUTIONS,
SECURITIES COMPANIES AND INVESTMENT COMPANIES:
SUBJECT: RULES FOR THE PLACEMENT OF MONETARY REGULATION BONDS (BREMS) AND FEDERAL GOVERNMENT DEVELOPMENT BONDS (BONDES D) CARRIED OUT BY THE BANK OF MEXICO

The Bank of Mexico, based on the provisions of Articles 7, fraction I, 8, 14, 17 and 24 of its Law and considering: i) that the Federal Government has determined to issue BONDES D which may be acquired by the Bank of Mexico itself and placed by it in the secondary market, and ii) the convenience of compiling in a single circular the placement rules for the aforementioned BREMS and BONDES D directed to the various intermediaries that may participate in the respective auctions, has resolved, effective from this date, to repeal section CB.6 of Circular 115/2002 directed to securities companies; Annex 18 of Circular 2019/95 directed to multiple banking institutions; Annex 6 of Circular 1/2006 directed to development banking institutions and to Rural Finance, and Circular 1/2002 directed to investment companies insofar as it relates to the “Rules for the Placement of Monetary Regulation Bonds”, as well as to issue the following:

RULES FOR THE PLACEMENT OF MONETARY REGULATION BONDS (BREMS) AND FEDERAL GOVERNMENT DEVELOPMENT BONDS (BONDES D) CARRIED OUT BY THE BANK OF MEXICO

INDEX

1. BIDDERS
2. TYPES OF AUCTIONS
3. CALLS
4. BIDS
   4.1 TYPES OF BIDS
   4.2 LIMITS OF BIDS
   4.3 SUBMISSION OF BIDS
   4.4 EFFECTS OF BIDS
5. ALLOCATION
   5.1 SINGLE PRICE
   5.2 MULTIPLE PRICE
   5.3 PROVISIONS COMMON TO ALL AUCTIONS
6. RESULTS
7. DELIVERY OF THE SECURITIES AND PAYMENT OF THEIR PRICE
8. GENERAL PROVISIONS
   ANNEX.- MODEL LETTER OF INSTRUCTIONS TO CREDIT THE ACCOUNTS OF CREDIT INSTITUTIONS OR SECURITIES COMPANIES.

For brevity, in these Rules, BREMS and BONDES D may be designated jointly or separately as SECURITIES and S.D. Indeval, S.A. de C.V., Securities Depository Institution, INDEVAL.

1. BIDDERS
   1.1 Only the following persons may submit bids and, therefore, acquire SECURITIES in accordance with the auction procedure provided for in these Rules:
   a) Securities companies, b) Credit institutions, c) Investment companies, and d) Other persons expressly authorized for this purpose by the Bank of Mexico. The corresponding authorization may be limited or revoked at any time by the Central Bank itself.
   1.2 The aforementioned persons must always act on their own account. Investment companies regulated by the Investment Companies Law shall submit their bids through the investment company operator that provides them with asset administration services.
   1.3 The Bank of Mexico will not accept bids from the aforementioned persons when, in its judgment, they fail to comply with applicable provisions or do not conform to sound uses or practices of the securities market.

2. TYPES OF AUCTIONS
   Auctions may be:
   2.1 Traditional: those in which bidders submit their bids without having information about the behavior of other bidders. Bidders receive information from other participants until the results of the auction are made public.
   2.2 Interactive: those in which bidders submit their bids knowing at all times the marginal allocation price of the auction.

3. CALLS
   The Bank of Mexico will make known the calls for auctions, starting at 12:00 hours on the last business day of the week immediately preceding that in which the auction in question will take place, through its electronic page on the worldwide network (Internet) identified by the domain name: www.banxico.org.mx or through any other electronic, computing or telecommunications medium authorized for this purpose by the Bank of Mexico, unless the Bank itself makes known another date or time for a particular call.

Such calls will make known the characteristics of the auctions and the SECURITIES and must refer to SECURITIES of the same class, indicating: the dates and times at which the auction will be held; the date on which the respective SECURITIES will be delivered; the number of the call; the issuance key; the type of auction in question; the method of allocating the SECURITIES; the amount in real value offered in each call, as well as the other characteristics of the respective auctions.

4. BIDS
   4.1 TYPES OF BIDS
   Bids may only be competitive.
   The bidder must indicate the amount and the unit price at which they are willing to acquire the SECURITIES subject to the auction. Such price shall be expressed rounded to ten-thousandths. The price of SECURITIES issued prior to the placement date shall not include accrued but unpaid interest during the current interest period.

4.2 LIMITS OF BIDS
4.21. Each bid shall not exceed the maximum amount of the call.
4.22. The bidders referred to in subsection d) of section 1.1 must comply with the limits and other general requirements that the Bank of Mexico may determine, as applicable.

4.3 SUBMISSION OF BIDS
4.31. Interested parties must submit their bids through the Bank of Mexico's Customer Account Attention System (SIAC-BANXICO), or through any other electronic, computing or telecommunications medium authorized for this purpose by the Bank of Mexico. The access, identification and, where applicable, operation keys established for the use of electronic computing or telecommunications media will substitute the handwritten signature with an electronic one, so that documentary or technical records in which they appear will produce the same effects that laws grant to documents signed by the parties and, consequently, will have equal probative value.
4.32. Bids must be submitted specifying the amount in real value of the SECURITIES, in amounts rounded to one million pesos or multiples thereof.
4.33. The dates and times for submitting bids will be made known in the respective call.

4.4 EFFECTS OF BIDS
4.41. Bids submitted to the Bank of Mexico in accordance with section 4.31 will produce the broadest effects corresponding in law and will imply the bidder's acceptance of each and every one of these Rules.
Every bid will be binding on the bidder who submits it and will be irrevocable.
4.42. The Bank of Mexico may void the bids it receives if they do not comply with these Rules; are not clearly legible; have erasures or corrections; or are incomplete or in any way incorrect.
Likewise, the Bank of Mexico may reject bids regarding one or more issuances if, in its judgment, their participation, due to their characteristics, could produce undesirable effects for credit regulation objectives; for the sound development of the securities market in particular or the financial market in general; or if it considers that they are not consistent with the conditions prevailing in the market.

5. ALLOCATION
   5.1 SINGLE PRICE
   Bids will be allocated in descending order of their corresponding unit prices, without exceeding the amount indicated in the call.
   The single price of the auction at which the SECURITIES in question will be allocated will be that corresponding to the last bid that receives allocation, even if it has not been fully met in its amount.

5.2 MULTIPLE PRICE
5.21. The amount indicated in the call will be distributed by allocating bids in descending order of their corresponding unit prices without exceeding the amount indicated in the call. The SECURITIES of each bid will be allocated precisely at the unit price indicated in the bid itself.
Based on the bids that have received allocation, the weighted average price of the auction will be determined, as applicable.

5.3 PROVISIONS COMMON TO ALL AUCTIONS
5.31. In the event of tied bids at any level and the amount to be allocated is insufficient to meet such bids, they will be met pro rata of their amount, except when they are bids submitted in interactive auctions, which will be met in the order in which they were received.
5.32. The Bank of Mexico may determine in any auction the minimum unit price at which it is willing to place the SECURITIES subject to the own auction.
In these cases, bids with lower prices will not be met.
5.33. Allocations will be made in amounts, at their real value, rounded to millions of pesos. The number of values to be received will be determined by dividing the amount allocated to each of the bids by the allocation price including, where applicable, accrued interest. When the number of values to be received is not an integer, it will be adjusted to the next lower integer.
5.34. The mentions contained in these Rules regarding prices refer to clean prices, that is, those that do not include accrued but unpaid interest.

6. RESULTS
   The results of the auctions will be available through SIAC-BANXICO, within ten minutes following the expiration of the deadline for submitting bids in each auction.

7. DELIVERY OF THE SECURITIES AND PAYMENT OF THEIR PRICE
   7.1 The Bank of Mexico, based on Articles 2312 and 2331 of the Federal Civil Code, reserves ownership of the SECURITIES subject to the sale until the moment the bidder makes payment of the corresponding price in accordance with what is provided in this section.
   7.2 The delivery of the allocated SECURITIES will be through INDEVAL, on the date fixed in the respective call, by means of the respective deposit in the account that INDEVAL maintains for each bidder. What is provided in this section will be carried out in terms of what is established in the Internal Regulations of Indeval.
   The persons referred to in subsections c) and d) of section 1.1 must settle the bids that have received allocation through a credit institution or securities company. To this effect, the credit institution or securities company designated by the bidders must send to the National Operations Processing Management of the Bank of Mexico a communication in terms of the Annex. The settlement of SECURITIES issued prior to the settlement date of the auctions must be carried out by adding to the respective unit price the accrued but unpaid interest, from the date of their issuance or from the last interest payment as applicable, up to the aforementioned settlement date, according to the following formula:

I_dev = VN * (r * d / 36000) (1)

Where:
I_dev = accrued interest.
VN = Nominal value of the title. d = Days elapsed between the issuance date or last interest period, as applicable, and the settlement date. c = The rate resulting from the following formula, expressed as a percentage with rounding to two decimal places.

c = (36000 / (36000 - r_i * l_i)) * Product_{i=1 to N} (1 + r_i) (2)

Where:
N = Number of natural days elapsed between the issuance date of the title or the last interest period and the settlement date. i = Refers to each of the natural days between the issuance date of the title or the last interest payment and the maturity date of the interest period, taking values from 1 to N. Product = Operator meaning to perform the multiplication of the factors between parentheses. r_i = Annual interest rate, expressed as a percentage with rounding to two decimal places, at which credit institutions and securities companies carry out purchase, sale and repurchase operations for one business day with bank titles known in the market as "Banked weighted funding rate", calculated and made known on day i by the Bank of Mexico, through its electronic page www.banxico.org.mx, in terms of the publication in the Official Gazette of the Federation dated July 31, 2000, or through any other electronic, computing or telecommunications medium authorized for this purpose by the Bank of Mexico itself. In the latter case, the medium by which such rate will be disseminated will be informed promptly. In the event of a non-business day, the rate announced on the immediately preceding business day will be used. In the event that this rate cannot be determined or ceases to be made known, the Bank of Mexico will request in writing from two "brokerage houses" selected by the Mexican Bank Association, A.C., the average of the purchase, sale and repurchase operations for one day with bank titles. The Bank of Mexico will calculate the average of the two rates obtained for its determination and will make the result known in the form and means mentioned, as a substitute rate for the aforementioned one.
7.3 Except for what is provided in sections M.44 of Circular 2019/95 directed to multiple banking institutions and BD.38 of Circular 1/2006 directed to development banking institutions and to Rural Finance, in the event that a bidder does not make the total payment of the SECURITIES assigned to them, the Bank of Mexico may, without the need for a judicial declaration, rescind the sale for the uncovered amount. Without prejudice to the foregoing, the Bank of Mexico may disqualify said bidder from participating in auctions for the placement of SECURITIES in terms of these Rules.

8. GENERAL PROVISIONS
   8.1 For market information, the Bank of Mexico will make known to the general public the call for auctions and the general results thereof, through its electronic page on the worldwide network (Internet) or through any other electronic computing or telecommunications medium authorized for this purpose by the Bank of Mexico itself.
   8.2 All times referred to in these Rules are referenced to the time zone of Mexico City, Federal District.
   In the event that, due to force majeure or fortuitous event, the calls or results of the auctions cannot be made known, in accordance with what is stated in sections 3. and 6., the Bank of Mexico will promptly communicate the applicable procedure to make such calls or the results of the corresponding auctions known.

ANNEX
MODEL LETTER OF INSTRUCTIONS TO CREDIT THE ACCOUNTS OF CREDIT INSTITUTIONS OR SECURITIES COMPANIES 1 (LETTERHEAD OF THE CREDIT INSTITUTION OR SECURITIES COMPANY) Mexico, D.F., ___ of _______ 200_.
BANK OF MEXICO
NATIONAL OPERATIONS MANAGEMENT
Av. 5 de Mayo No. 6, Col. Centro,
Mexico, D.F. 06059

(DENOMINATION OF THE CREDIT INSTITUTION OR SECURITIES COMPANY), authorizes and instructs irrevocably the Bank of Mexico to process on our behalf, in the securities and control accounts that S.D. Indeval, S.A. de C.V., Securities Depository Institution, maintains for us, the settlement of the operations of Monetary Regulation Bonds (BREMS) and Federal Government Development Bonds (BONDES D) that, as a result of the auctions for the placement of said securities in terms of the “RULES FOR THE PLACEMENT OF MONETARY REGULATION BONDS (BREMS) AND FEDERAL GOVERNMENT DEVELOPMENT BONDS (BONDES D) CARRIED OUT BY THE BANK OF MEXICO”, correspond to (DENOMINATION OF THE BIDDER).

Likewise, we make known to you that this document may only be modified or cancelled by means of written communication addressed to said Central Bank and presented with at least one banking business day in advance of the date on which the respective modification or cancellation is intended to take effect.

Sincerely,

(DENOMINATION OF THE CREDIT INSTITUTION OR SECURITIES COMPANY) (NAME AND SIGNATURE OF AUTHORIZED OFFICIALS) __________________________

1 This document must show the knowledge of signatures granted by the Cash Account Operations Office of the Bank of Mexico, so that said signatures must be registered in the aforementioned Office.