Circular 4/2012 — Derivatives Operations

(Second Section) OFFICIAL GAZETTE Friday, March 2, 2012 BANK OF MEXICO CIRCULAR 4/2012 addressed to Credit Institutions, Brokerage Houses, Investment Companies, Limited Purpose Financial Societies and the Rural Financial Institution, regarding Derivatives Operations.

A logo appears at the margin, stating: Bank of Mexico.

CIRCULAR 4/2012
TO CREDIT INSTITUTIONS, BROKERAGE HOUSES,
INVESTMENT COMPANIES,
LIMITED PURPOSE FINANCIAL SOCIETIES AND THE RURAL FINANCIAL INSTITUTION:
SUBJECT: DERIVATIVES OPERATIONS

The Bank of Mexico, in order to continue promoting the sound development of the financial system, considers it convenient to unify and compile in a single regulatory framework the rules regarding derivatives operations that financial institutions in the country may perform.

Therefore, based on Article 28, sixth and seventh paragraphs, of the Political Constitution of the United Mexican States; Articles 24, 26, 27 and 36 of the Bank of Mexico Law; Article 46, fraction XXV, Article 46 Bis 5, fraction II, and the penultimate paragraph of Article 103 of the Credit Institutions Law; Article 176 of the Securities Market Law; Article 15, second paragraph, of the Investment Companies Law; Article 22 of the Law for Transparency and Regulation of Financial Services; Article 9 of the Organic Law of Nacional Financiera; Article 6 of the Organic Law of the Federal Mortgage Society; Article 9 of the Organic Law of the National Savings Bank and Financial Services; Article 9 of the Organic Law of the National Bank of Foreign Trade; Article 10 of the Organic Law of the National Bank of Public Works and Services; Article 8 of the Organic Law of the National Bank of the Army, Air Force and Navy; Article 7, fraction X, and Article 19 of the Organic Law of the Rural Financial Institution; Article 4, first paragraph, Articles 8, fourth and seventh paragraphs, Article 10, first paragraph, Article 12, first paragraph in relation to Article 19, fraction VII, Article 14 Bis, first paragraph in relation to Article 17, fraction I, and Article 14 Bis 1, first paragraph in relation to Articles 25 Bis 1, fraction IV, and 25 Bis 2, fraction II of the Internal Regulations of the Bank of Mexico, which grant it the authority to issue provisions through the General Directorate of Central Bank Operations, the General Legal Directorate, and the General Directorate of Financial System Affairs, respectively, as well as Article 2 of the Agreement on the Assignment of Administrative Units of the Bank of Mexico, fractions III, VII and XI, has resolved to issue the following:

RULES FOR THE EXECUTION OF DERIVATIVES OPERATIONS

1. DEFINITIONS
   For brevity, the following terms, in singular or plural, shall be understood as:

Risk Asset: the asset whose Credit Risk is transferred, in whole or in part, from the Protection Buyer to the Protection Seller.

Reference Asset: the asset used to determine when a Credit Event occurs. The Reference Asset and the Risk Asset may be the same.

Brokerage Houses: legal entities authorized to operate as such in accordance with the provisions of the Securities Market Law.

Protection Buyer: the person who, by virtue of their participation in a Credit Derivatives Transaction, is protected, in whole or in part, from the Credit Risk of a Risk Asset.

CNBV: the National Banking and Securities Commission.

Swap Contracts: operations in which the parties agree to exchange cash flows during a specified period.

Credit Default Derivatives: operations in which the Protection Buyer is obligated to pay a premium to the Protection Seller, in exchange for the latter delivering the agreed consideration in the event that a Credit Event occurs.

Total Return Derivatives: operations in which the Protection Buyer is obligated to pay the Protection Seller the cash flows generated by a Risk Asset, as well as any appreciation in the value of said Risk Asset, and the latter in turn is obligated to pay the former an interest rate plus any depreciation in the value of the Risk Asset, with the possibility that, in the event that a Credit Event occurs, the former will deliver the Risk Asset and the latter the agreed amount.

Business Day: a day that is a business day both in the United Mexican States in accordance with the general provisions issued for such purpose by the CNBV, and in the market or markets where the settlement of the operation takes place.

Currencies: the United States dollar, as well as any other freely transferable and immediately convertible currency into the aforementioned currency.

Entities: Credit Institutions, Brokerage Houses, and the Rural Financial Institution, jointly or separately.

Foreign Financial Entities: those authorized to act as financial entities by the competent authorities of the countries in which they are incorporated.

Credit Event: the occurrence that, if it happens, obliges the parties to a Credit Derivatives Transaction to fulfill the obligations stipulated in the contract under the agreed terms.

Settlement Date: the Business Day on which the fulfillment of the obligations agreed upon in Derivatives Transactions is due.

Rural Financial Institution: the decentralized organism of the Federal Public Administration sectorized under the Ministry of Finance and Public Credit in accordance with the provisions of the Organic Law of the Rural Financial Institution.

Management: the Management of Authorizations, Consultations and Legal Compliance of the Bank of Mexico.

Credit Institutions: legal entities authorized to operate as such in accordance with the provisions of the Credit Institutions Law.

Settlement: the fulfillment of the obligations of the parties in a Derivatives Transaction.

Markets: Recognized Markets and over-the-counter markets.

Recognized Markets: MexDer, Mexican Derivatives Market, S.A. de C.V., located in Mexico City, Federal District; as well as any other organized market where derivatives transactions are conducted, established in countries that are part of the European Union and the Organization for Economic Co-operation and Development (OECD), as well as those whose authorities belong to the Technical Committee of the International Organization of Securities Commissions (IOSCO).

Credit Derivatives Transactions: Credit Default Derivatives, Total Return Derivatives, and Credit-Linked Notes.

Derivatives Transactions: interchangeably, Forward Transactions, Option Transactions, Swap Contracts, and Credit Derivatives Transactions, as well as any others that the Bank of Mexico may authorize in accordance with section 3.4 of these Rules.

Forward Transactions: purchase or sale operations of an Underlying, pursuant to which the parties agree to fulfill their respective obligations at the agreed price of said Underlying at the time the operation is concluded. These operations must be settled on a date subsequent to the fourth Business Day following the date of their conclusion.

Option Transactions: operations in which the buyer, by paying a premium to the seller, acquires the right, but not the obligation, to buy or sell an Underlying at the agreed price at the time the operation is concluded, on one or more Business Days, and the seller is obligated to sell or buy, as appropriate, said Underlying.

Credit Risk: the possibility of incurring a loss when a Credit Event occurs.

Investment Companies: legal entities authorized to operate as such in accordance with the provisions of the Investment Companies Law.

Sofoles: legal entities authorized to operate as Limited Purpose Financial Societies in accordance with the provisions of the Credit Institutions Law.

Underlyings: interest rates, assets, securities, prices, indices, or operations that are the subject of a Derivatives Transaction, as indicated in section 2.1 and, where applicable, those authorized in accordance with section 3.4 of these Rules.

Credit-Linked Notes: instruments or securities that pay a return and whose value is conditioned on the performance of a Risk Asset and that, in the event that a Credit Event occurs, the issuer of the instrument or security (Protection Buyer) delivers to the investor (Protection Seller) the Risk Asset or the agreed amount.

UDIS: accounting units, whose value in national currency is published by the Bank of Mexico in the Official Gazette of the Federation, in accordance with Article 3 of the "Decree establishing the obligations that may be denominated in investment units and reforming and adding various provisions of the Federal Tax Code and the Income Tax Law" and Article 20 Ter of the Federal Tax Code.

Protection Seller: the person who, by participating in a Credit Derivatives Transaction, covers their counterparty, in whole or in part, from the Credit Risk of a Risk Asset.

2. UNDERLYINGS
   2.1 Entities may only perform Derivatives Transactions on the following Underlyings:
   a) Shares, a group or basket of shares, or share-referenced securities, that trade on a stock exchange; b) Price indices on shares that trade on a stock exchange; c) National currency, Currencies, and UDIS; d) Price indices related to inflation; e) Nominal, real, or excess interest rates, rates related to any debt security, and indices based on such rates; f) Loans and credits; g) Gold and silver; h) Corn, wheat, soybeans, and sugar; i) Pork meat; j) Natural gas; k) Aluminum and copper; l) Rice, sorghum, cotton, oats, coffee, orange juice, cocoa, barley, cattle, swine, milk, canola, soybean oil, and soybean meal, and m) Forward Transactions, Option Transactions, and Swap Contracts, on the Underlyings referred to in the preceding subsections.

2.2 Brokerage Houses may only perform Credit Derivatives Transactions on behalf of third parties in accordance with the provisions of section 8.

2.3 Investment Companies and Sofoles may only carry out Derivatives Transactions on Underlyings included in section 2.1 of these Rules that, according to their investment regime or corporate purpose, respectively, are authorized to operate.

3. AUTHORIZATIONS
   3.1 ENTITIES
   3.1.1 Entities must obtain authorization from the Bank of Mexico to enter into Derivatives Transactions on their own account.
   To this effect, the aforementioned Entities must submit an authorization request to the Management specifying the following:
   a) Types of Derivatives Transactions they intend to carry out; b) Markets in which they intend to operate, and c) Underlyings.
   Additionally, they must accompany the request with a communication issued by their audit committee stating that they comply with the requirements set forth in the Annex of these Rules, regarding Derivatives Transactions and the Underlyings for which they request authorization to operate on their own account.

3.1.2 Entities that obtain authorization to enter into Derivatives Transactions on their own account may enter into other types of Derivatives Transactions, operate in other Markets, or enter into Derivatives Transactions on Underlyings from those provided in section 2.1, different from those indicated in said authorization, provided that:
a) They give written notice to the Management at least 15 natural days in advance of the date on which they intend to carry out the operations in question, regarding the following:
i) The type of Derivatives Transactions they intend to carry out on their own account; ii) The Markets in which they intend to operate, and/or iii) The Underlyings referred to in the aforementioned section 2.1 on which they intend to enter into Derivatives Transactions on their own account. b) They attach a new communication in accordance with the provisions of the third paragraph of section 3.1.1.

3.1.3 When Credit Institutions and the Rural Financial Institution are authorized to enter into Derivatives Transactions on their own account, they must send to the Management during the month of March of each year, a communication issued by their respective audit committee stating that such Entities comply with the requirements set forth in the Annex of these Rules, regarding those Derivatives Transactions they perform and the Underlyings subject to such operations.
Brokerage Houses that are authorized to enter into Derivatives Transactions on their own account must send the communication referred to in the preceding paragraph during the month of May of each year.
Exceptionally, when it deems it appropriate, the Bank of Mexico may request that Entities present the aforementioned communications on dates different from those indicated in the preceding paragraphs.

3.1.4 Entities may carry out Forward Transactions on their own account, without being subject to the provisions of these Rules, when:
a) The Settlement Date does not exceed four Business Days after the date of conclusion; b) Their counterparty is the issuer of the debt security subject to the operation and it is a primary issuance, or c) The Underlyings of the Forward Transactions in question are Federal Government Development Bonds of the United Mexican States, with a fixed interest rate, in national currency, and the Settlement is carried out within a period not exceeding eight Business Days counted from their date of conclusion.

3.1.5 Entities may carry out Derivatives Transactions on their own account, without needing to comply with the requirements set forth in sections 3.1.1, 3.1.2, and 3.1.3, when such operations have the exclusive purpose of hedging risks inherent to the Entity.
For this purpose, such Entities must: i) have a risk management and control unit or, failing that, hire specialists to value, measure, and monitor such risks, and ii) report semi-annually to their board of directors or board of trustees, as appropriate, regarding the carrying out of these operations and their limits, including in said report the calculation on the efficiency of the hedge.

3.1.6 The Bank of Mexico may grant the authorization referred to in section 3.1.1 of these Rules, without the Entities in question needing to include in the respective request the communication referred to in the last paragraph of said section 3.1.1, provided that the Derivatives Transactions carried out by such Entities on their own account are offset by others of the same type, but of a contrary nature, for the same amount and term, as well as on the same Underlyings.
To this effect, Entities must submit the request referred to in the second paragraph of section 3.1.1 at least 15 natural days in advance of the date on which they intend to begin concluding such Derivatives Transactions.
Likewise, such Entities must send the communication referred to in the last paragraph of section 3.1.1 within the year following the date on which they presented the request mentioned in the preceding paragraph to the Bank of Mexico. In the event that Entities do not comply with this requirement, the authorization granted by the Bank of Mexico will lose its effect from the day following the end of the year referred to in this paragraph, so the Entities in question must refrain from concluding and carrying out new Derivatives Transactions of those for which they had requested authorization in accordance with the preceding paragraph and may not subsequently request a new authorization for such Derivatives Transactions, in accordance with this section.

3.2 INVESTMENT COMPANIES
Investment Companies may only perform Derivatives Transactions on Underlyings, subject to the general provisions issued by the CNBV and without requiring authorization from the Bank of Mexico.
These operations may be carried out in any Market.

3.3 SOFOLES
Sofoles may only carry out Derivatives Transactions on Underlyings for the purpose of hedging inherent risks, and to carry out these operations, they do not require authorization from the Bank of Mexico.
For this purpose, Sofoles must have a risk management and control unit or, failing that, hire specialists to value, measure, and monitor such risks. Likewise, Sofoles must report at least once every semester to their board of directors regarding the carrying out of these operations and their limits, including in said report the calculation on the efficiency of the hedge. These operations may be carried out in any Market.

3.4 OTHER DERIVATIVES OPERATIONS OR WITH OTHER UNDERLYINGS
The Bank of Mexico may authorize Entities, Investment Companies, and Sofoles to perform derivatives operations other than Forward Transactions, Option Transactions, Swap Contracts, or Credit Derivatives Transactions, as well as with Underlyings other than those indicated in section 2.1 of these Rules. To this effect, interested parties must submit a written authorization request to the Management describing the derivatives operation they intend to perform or the respective Underlying.

4. AUTHORIZED COUNTERPARTIES
   Entities may carry out Forward Transactions, Option Transactions, and Swap Contracts with any person.
   Entities may only carry out Derivatives Transactions for the hedging of inherent risks, in accordance with section 3.1.5 of these Rules, when they do so with Entities authorized by the Bank of Mexico to enter into Derivatives Transactions on their own account, with Foreign Financial Entities, or in Recognized Markets. Credit Institutions and the Rural Financial Institution may only carry out Credit Derivatives Transactions with other Credit Institutions authorized by the Bank of Mexico to enter into such Derivatives Transactions on their own account, with other Mexican financial entities authorized to perform such operations, or with Foreign Financial Entities. Investment Companies and Sofoles may carry out Derivatives Transactions only with Entities authorized by the Bank of Mexico to enter into Derivatives Transactions on their own account and with Foreign Financial Entities, as well as in Recognized Markets.

Friday, March 2, 2012 OFFICIAL GAZETTE (Second Section)

5. INSTRUMENTATION
   Derivative Operations, except for Credit-Linked Notes, carried out by Entities among themselves and with other national or foreign financial entities, as well as those carried out by Investment Societies and Sofoles with their authorized counterparties, shall be documented in master agreements, which must reflect guidelines and directives contained in contract models recognized in international markets, such as those approved by the “International Swaps and Derivatives Association, Inc.”, provided that this does not contravene applicable national provisions. Credit-Linked Notes shall be documented in an issuance deed. Derivative Operations that Entities enter into with clients other than those contemplated in the first paragraph of this section shall be carried out under master agreements agreed upon with them. Derivative Operations and their characteristics may be agreed upon through the form established by the master agreement itself. This shall be permissible provided that Entities, Investment Societies, and Sofoles register such operations and invariably confirm them through any means that leaves written evidence of the celebration of the corresponding operation, on the same day it is celebrated. In the event that the use of electronic, computing, or telecommunication means is agreed upon for the negotiation or confirmation of operations, the reciprocal identification keys and the responsibilities resulting from their use shall be specified.

6. COLLATERAL
   Entities, Investment Societies, and Sofoles may guarantee the fulfillment of Derivative Operations with cash deposits, credit rights in their favor and/or the titles or securities in their portfolio.
   With respect to Derivative Operations carried out in over-the-counter markets, Entities, Investment Societies, and Sofoles may only grant the guarantees mentioned in the previous paragraph when the counterparties are Credit Institutions, Brokerage Houses, Foreign Financial Entities, Investment Societies, specialized investment societies for retirement funds, Sofoles, as well as any other counterparty authorized by the Bank of Mexico. Entities and Investment Societies may in no case receive subordinated obligations as collateral for the fulfillment of Derivative Operations they enter into. Furthermore, Entities may not receive shares issued by financial entities or holding companies of financial groups as collateral.

7. SETTLEMENT METHODS
   7.1 Settlement of Derivative Operations may be effected through the delivery of the predetermined Underlyings or a sum of money, in accordance with the nature of the operation and what the parties agree.
   7.2 Entities that, on their own account, enter into Derivative Operations on the Underlyings indicated in letters h), i), j), k) and l) of section 2.1 are prohibited from settling them in kind.
   7.3 Brokerage Houses must carry out the Settlement of Derivative Operations in over-the-counter markets on the Underlyings indicated in letter a) of section 2.1 as follows: i) it shall not be in kind, and ii) it shall not be carried out within a period less than four Business Days following the date of negotiation of the operation.

8. OPERATIONS ON BEHALF OF THIRD PARTIES
   Entities may carry out Derivative Operations on behalf of third parties prior to express instruction by their clients, in accordance with what is provided in Circular 1/2005 which contains the “Rules to which credit institutions; brokerage houses; insurance institutions; surety institutions, limited object financial societies and the Rural Financing Institution shall be subject, in trust operations.” Furthermore, Brokerage Houses, when carrying out Derivative Operations in compliance with a mandate or commission, shall be subject to what is provided in the Securities Market Law, as well as in other applicable provisions.

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9. OPERATIONS WITH RELATED PARTIES
   Multiple Banking Institutions and Brokerage Houses that carry out Derivative Operations with related parties or on Underlyings whose issuers or obligors are related parties, shall observe what is provided for this purpose in the Credit Institutions Law and in the Securities Market Law, respectively.

10. PROHIBITIONS
    10.1 Entities, Investment Societies, and Sofoles shall not enter into Derivative Operations on terms other than those provided in these Rules.
    10.2 Entities shall not charge commissions for Derivative Operations they enter into, except in cases where they act on behalf of third parties in accordance with what is established in section 8 of these Rules.
    10.3 Entities shall not offer the execution of Derivative Operations at the counters of their branches.
    10.4 Entities shall not enter into Derivative Operations when the respective Underlying does not have an interest rate or market reference price, except: i) if its counterparty is a Credit Institution, Brokerage House or Foreign Financial Entity or, ii) when Derivative Operations are carried out with the Underlyings indicated in letter f) of section 2.1 of these Rules.
    10.5 Brokerage Houses shall not carry out Credit Derivative Operations on their own account. Investment Societies and Sofoles shall not carry out Credit Derivative Operations.
    10.6 In Credit Derivative Operations, the Protection Buyer and the Protection Seller may not assign their rights or obligations to third parties, unless the terms of the assignment are provided for in the contracts in which these operations are documented.

11. LIMITATION, SUSPENSION OR REVOCATION OF OPERATIONS
    The Bank of Mexico may limit, suspend or revoke the authorizations granted to Entities under these Rules to carry out Derivative Operations when:
    a) They infringe the applicable provisions regarding the operation in question; b) They cease to meet any requirement of the Annex to these Rules; c) They have a capitalization index lower than that provided in the applicable provisions; d) They do not provide the information that the Bank of Mexico requests from them under section 12 of these Rules, either regarding the Entity itself or the societies referred to in the second paragraph of said section, or provide it late, incorrectly or incompletely; e) They carry out operations in contravention of sound usages or practices corresponding to such operations, and f) The Entities themselves so request.

12. INFORMATION
    Entities, Investment Societies, and Sofoles shall provide the Information Directorate of the Financial System of the Bank of Mexico with information regarding the Derivative Operations they carry out in the form and deadlines required of them.
    In such information, Entities shall include details regarding Derivative Operations carried out by financial entities with respect to which they are direct or indirect owners of shares with voting rights representing at least fifty-one percent of the paid-in capital; have control of the general shareholders' meeting; are in a position to appoint the majority of the members of the board of directors, or, by any other means, control the aforementioned financial entities.

13. SANCTIONS
    Entities and Sofoles that fail to comply with the provisions contained in these Rules shall be sanctioned by the Bank of Mexico in accordance with the Bank of Mexico Law and other applicable provisions.
    Investment Societies that fail to comply with the provisions contained in these Rules shall be sanctioned by the CNBV in accordance with what is stated in the Investment Societies Law.

Friday, March 2, 2012 OFFICIAL GAZETTE (Second Section)

ANNEX
REQUIREMENTS FOR ENTITIES INTENDING TO CARRY OUT DERIVATIVE OPERATIONS
I. ADMINISTRATIVE REQUIREMENTS.
1.- The General Management shall establish and the Board of Directors or the Executive Board, as applicable, shall specifically approve:
a) The objectives, goals and general procedures for operation with clients and other intermediaries in the market. b) The maximum tolerances of market, credit and other risks considered acceptable for the Entity in the market, and c) The approval procedures for new financial products related to these products. 2.- The General Management shall designate and the Board of Directors or the Executive Board, as applicable, shall approve a risk area, different from the risk-taking areas, directly dependent on the General Management or the risk committee, whose purpose will be:
a) To measure, evaluate and follow up on market, credit (counterparty), liquidity and operational risks arising from these instruments; b) To communicate, as soon as they are known, to the General Management any deviation from the limits established for operations that eliminate risks, and c) To report daily to the General Management or the Executive Board, as applicable, and systematically to the Board of Directors regarding the Entity's operation in the market. 3.- The General Management and a committee designated by the Board of Directors or the Executive Board, as applicable, shall be involved, in a systematic and timely manner, in the follow-up of the administration of market, credit, liquidity and other risks they consider relevant from the market. Likewise, they shall establish a review program of the objectives, goals and operation and control procedures, as well as risk tolerance levels at least with semi-annual periodicity and whenever market conditions warrant it. 4.- The General Management shall have a contingency action procedure that allows it to act when it is detected that policies, procedures, internal controls, the managerial information system or risk tolerance levels are deficient or when violations of applicable laws, norms or circulars occur. Additionally, an operational contingency plan shall be available that guarantees the continuity of operations in the face of unexpected events. 5.- The General Management and a committee designated by the Board of Directors shall establish a Professional Ethics Code that governs the conduct of involved personnel. 6.- The General Management shall implement a continuous training program directed at operators, support personnel, the risk follow-up area and in general all personnel involved in the handling and control of these instruments.

II. OPERATIONAL REQUIREMENTS.
7.- The different areas responsible for market operation and supervision shall have established the particular objectives, goals and procedures for operation and control, as well as the maximum risk tolerances acceptable by area, which shall be consistent with the general guidelines established by the General Management. 8.- The Entity shall have at least two competent operators, duly trained and coached and as an additional requirement at least one of them with recognized experience in the market. Furthermore, they shall know the operation and control policies and procedures, as well as the ethical standards that govern the Entity. 9.- The Entity shall have a system that allows the risk follow-up area and the persons responsible for the operation area to systematically and timely supervise the activity of operators and promoters of operations specific to the market.

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10.- The Entity shall have a system that allows operators to follow up on the positions assigned to them, as well as verify compliance with their market, credit and other limits established by the Entity.
11.- The Entity shall have systems that allow the processing of operations, valuation and risk control preferably in real time, both in operation and in the support area.
12.- The operation area together with the risk follow-up area shall establish valuation models consistent with the technology developed to date, which shall be known to the support area and mastered by the operators.
These models shall be authorized by the Entity's risk committee. Modifications to the models and their parameters shall be authorized by the risk committee and shall be registered along with the corresponding justification.

III. INTERNAL CONTROL REQUIREMENTS.
III.1 General.
13.- The activities and responsibilities of operation personnel and support personnel shall be adequately defined and assigned to the corresponding directorates.
Conflicts of interest shall be avoided in the areas responsible for the negotiation of operations and support to operation.
14.- Operation and control manuals shall be established in writing and made known to operation and support personnel, in such a way as to allow the correct execution of their functions in each of the involved areas such as: credit, promotion, operation, registration, confirmation, valuation, settlement, accounting and follow-up of all negotiated operations. 15.- The Entity shall establish internal criteria for the adequate analysis, evaluation, selection and approval of limits to clients who wish to participate in the celebration of Derivative Operations. 16.- Procedures shall be established to ensure that all negotiated operations are covered by a signed master agreement, and that they are duly documented, confirmed and registered. 17.- Procedures shall be established to ensure that these financial operations and their derivatives approved by the General Management have adequate operational support for their functioning and control. 18.- Without prejudice to the guidelines established by the Entity itself, an audit function shall be established which shall review, at least once a year, the compliance with operation and internal control policies and procedures, as well as adequate documentation of operations. 19.- Data processing systems, risk management systems and valuation models shall have adequate backup and control that includes data recovery.

III.2 Follow-up.
20.- The risk follow-up area shall have daily access to the operation and support systems so that it can measure and evaluate risks arising from operations and shall also provide daily to the General Management and systematically to the Board of Directors with duly verified reports that correctly and timely show the risks taken by the Entity.

III.3 Operation, registration and verification.
21.- Operation manuals shall establish policies, procedures and control mechanisms, such as those related to telephone recordings and reciprocal written confirmations of all terms of operations agreed upon between the parties, in order to ensure the truthfulness and authenticity of what was agreed. Unconfirmed operations, as well as those not registered by operators within a maximum period of twenty-four hours, shall be investigated immediately, systematically and timely, to be registered, reported and determine corrective actions. Likewise, necessary actions shall be taken to avoid the recurrence of this type of irregularity.

Friday, March 2, 2012 OFFICIAL GAZETTE (Second Section)

22.- All confirmations shall be executed by support personnel and they shall be the only ones who can receive confirmations from counterparties, which shall be duly compared with operation personnel reports daily and, in case of doubt, with the day's recording. 23.- The Entity shall establish procedures to verify, at least semi-annually, that operations are duly documented, registered, accounted for, confirmed and included in all reports.

III.4 Valuation.
24.- Valuation and risk measurement models shall be validated by experts who are independent of those who developed said models and operation personnel, at least once a year.
25.- The risk follow-up area shall directly collect information from reliable external sources that allow it to value the operations of the current portfolio.

III.5 Accounting.
26.- The accounting area shall verify operational records with accounting daily.
27.- Operations shall be accounted for in accordance with the standards established by competent authorities.
28.- Settlements shall be made by the accounting area under duly authorized instructions, verified amounts and with the confirmation of counterparties.
29.- Operation and control manuals shall contain written procedures to investigate operations not covered by the Entity and/or by the clientele, and report the results to the General Management for corrective actions, maintaining records of their investigation in a systematic manner.

III.6 Collateral.
30.- Operation and control manuals shall establish procedures that allow defining, controlling and ensuring the sufficiency of guarantees or credit lines that are granted, as applicable.

III.7 Legal.
31.- The Entity shall have procedures to verify master agreements, fact sheets and other formats that bind the Entity and the counterparty to the due fulfillment of their obligations before they are signed.

TRANSITIONAL PROVISIONS
FIRST. This Circular shall enter into force on June 1, 2012.
SECOND. From the entry into force of this Circular, the “Rules to which multiple banking institutions, brokerage houses, investment societies and limited object financial societies shall be subject, in the carrying out of derivative operations”, contained in Circular 4/2006 published in the Official Gazette of the Federation on December 26, 2006, are hereby repealed. THIRD. The authorizations to enter into Derivative Operations granted by the Bank of Mexico to development banking institutions prior to the entry into force of this Circular, shall become ineffective on March 31, 2013, therefore interested institutions wishing to continue carrying out Derivative Operations after that date in accordance with what is provided in sections 3.1.1 and 3.1.2 of these Rules, shall send the corresponding documentation during the month of February 2013.

Mexico, D.F., February 24, 2012.- BANK OF MEXICO: The General Director of Central Banking Operations, Francisco Javier Duclaud González de Castilla.- Rubric.- The General Legal Director, Héctor Reynaldo Tinoco Jaramillo.- Rubric.- The General Director of Financial System Affairs, José Gerardo Quijano León.- Rubric.

For any queries regarding the content of this Circular, please go to the Manager of Authorizations, Queries and Legal Control, located at Avenida 5 de Mayo number 2, Centro Neighborhood, Mexico, Federal District, C.P. 06059, or to the phones 5237.2308, 5237.2317 or 5237.2000 Ext. 3200.