Circular 8/2007 — Rules for the Purchase Auctions of Monetary Regulation Bonds (BREMS)

CIRCULAR 8/2007
Mexico City, D.F., August 28, 2007.
TO CREDIT INSTITUTIONS,
BROKERAGE HOUSES, INVESTMENT COMPANIES AND SPECIALIZED INVESTMENT COMPANIES FOR RETIREMENT FUNDS:
SUBJECT: RULES FOR THE PURCHASE AUCTIONS OF MONETARY REGULATION BONDS (BREMS)

The Bank of Mexico, based on Articles 28 of the Political Constitution of the United Mexican States, sixth and seventh paragraphs; 7, fraction I, 8, 14 and 24 of the Bank of Mexico Law; 22 of the Law for Transparency and Orderly Regulation of Financial Services; as well as Articles 8, 10, 12 in relation to Article 19, fraction IX, which provides for the attribution of the Operations Department to participate in the issuance of provisions, and 17, fraction I, which establishes the attribution of the Central Banking Provisions Department to issue provisions, all of the Internal Regulations of the Bank of Mexico published in the Official Gazette of the Federation on September 30, 1994, whose last modification was published in the aforementioned Official Gazette on April 26, 2007; as well as in the Single Article, fraction IV of the Agreement on the Attachment of Administrative Units of the Bank of Mexico, in accordance with what was announced in the presentation of the "Placement Program for the third quarter of 2007" made on June 28 of this year and with the objective of withdrawing BREMS from the market, has resolved to issue the following:

RULES FOR THE PURCHASE AUCTIONS OF MONETARY REGULATION BONDS (BREMS)

For the sake of brevity in these Rules, the following shall be understood, in singular or plural:
BREMS, as the Monetary Regulation Bonds issued by the Bank of Mexico; INDEVAL, as S.D. Indeval, Securities Depository Institution, S.A. de C.V.; and Auctions, as the auctions that are carried out under the terms provided herein.

1. BIDDERS
   1.1 Only the following persons may submit bids:
   a) Brokerage houses; b) Credit institutions; c) Investment companies; and d) Specialized investment companies for retirement funds.

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 the Bank's judgment, they fail to comply with applicable provisions or do not conform to sound uses or practices of the securities market.

2. CHARACTERISTICS OF THE AUCTIONS
   The Bank of Mexico will make known the calls for the Auctions no later than two banking business days prior to the date on which the respective Auction will be held, 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 determined for this purpose by the Bank of Mexico.

Such calls will make known the characteristics of the BREMS that the Bank of Mexico will purchase in each Auction; the dates and times at which the respective Auction will be held, as well as the date of its settlement.

At the opening of the Auctions, the Bank of Mexico will make known to the bidders the prices of the BREMS to be purchased, through its electronic page or through any other electronic, computing or telecommunications medium determined for this purpose by the Bank of Mexico itself.

3. BIDS
   3.1 TYPES OF BIDS
   Each bid must indicate, with respect to each BREM that the bidder offers to sell:
   a) the issuance key, and b) the total amount at nominal value in amounts expressed in pesos.

3.2 SUBMISSION OF BIDS
Interested parties must submit their bids on the date and time indicated in the respective call, through the Bank of Mexico's Account Holder Attention System (SIAC-BANXICO). In the event that for any reason said System is not in operation, the respective bids must be submitted in requests prepared according to the model attached as "Appendix 1" to these Rules. The Bank of Mexico may determine any other electronic, computing or telecommunications medium for the submission of bids.

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 where they appear will produce the same effects that laws grant to documents signed by the parties and, consequently, will have equal probative value.

Bids submitted in accordance with the model attached as "Appendix 1" must be delivered to the National Operations Management of the Bank of Mexico in a closed envelope accompanied by a cover letter. Both documents must be signed by the same representatives duly authorized by the bidder, and the letter must show the signature knowledge granted by the Bank of Mexico's Cash Account Operations Office, so that said signatures must be registered in the aforementioned Office.

3.3 EFFECTS OF BIDS
3.31. Bids submitted to the Bank of Mexico in terms of section 3.2 will produce the broadest effects corresponding in law and will imply the bidder's acceptance of all and each of these Rules.
Every bid will be binding for the bidder who presents it and will be irrevocable.

3.32. The Bank of Mexico may cancel the bids it receives if they do not conform to these Rules; are not clearly legible; have erasures or corrections; or are incomplete or incorrect in any way.

3.4 ASSIGNMENT
The Bank of Mexico will assign the entirety of the bids received in each Auction. The total amount of BREMS to be delivered by each bidder will be at nominal value and in amounts expressed in pesos.

4. COMMON PROVISIONS
   The mentions contained in these Rules regarding prices refer to clean prices, that is, those that do not include accrued but unpaid interest.

5. RESULTS
   5.1 The Bank of Mexico, through SIAC-BANXICO, no later than thirty minutes after the deadline for the submission of bids, will inform each bidder individually of the quantity of BREMS they must deliver.

Likewise, it will make available to all bidders, through its electronic page or through any other electronic, computing or telecommunications medium determined for this purpose by the Bank of Mexico itself, no later than thirty minutes after the deadline for the submission of bids, the general results of such Auction.

5.2 From the date of settlement of the Auctions, the Bank of Mexico's Library Services Office will make available to interested parties information on the bids received in the Auctions and the amount of BREMS purchased in each of them, without indicating the name of the bidder. The historical information corresponding to the Auctions carried out by the Bank of Mexico will be made available to interested parties in the aforementioned Office.

6. SETTLEMENT OF THE AUCTIONS
   6.1 On the settlement day, the Bank of Mexico will credit the amount of the purchase of BREMS to the account that, where applicable, the Bank of Mexico itself holds for the bidder who has received assignment. This is always provided that the BREMS from the bidder have previously been received in the Bank of Mexico's securities account at INDEVAL.

The Bank of Mexico will credit the amount of the purchase of the BREMS corresponding to the bidders referred to in paragraphs c) and d) of section 1. above, through the credit institution or brokerage house of their choice, which must present to the Bank of Mexico itself a communication in terms of "Appendix 2".

For the purposes of the above, all BREMS that bidders are obligated to deliver must be deposited in the Bank of Mexico's securities account at INDEVAL no later than 12:00:00 hours on the day the Auctions are settled.

In the event that by the hour mentioned in the previous paragraph, the respective BREMS have not been deposited in the aforementioned account, the Bank of Mexico may, without the need for a judicial declaration, rescind the purchase of the respective BREMS for the missing amount, so that the corresponding credits will not be made and the bidder in question will be obligated to pay the applicable conventional penalty.

The amount of the conventional penalty referred to in the previous paragraph will be equivalent to one percent of the nominal value of the BREMS that have not been delivered and on the same date of settlement of the Auctions it will be charged by the Bank of Mexico to the account that the Bank itself holds for the defaulting bidder or to the credit institution or brokerage house that has authorized the charge in terms of "Appendix 2".

6.2 The settlement of BREMS will be carried out by adding to the respective unit price the accrued but unpaid interest, from the last interest payment, to the corresponding settlement date, according to the following formula:

I_dev = VN x (d/360) x c
(1)

Where:
I_dev = Accrued interest.
VN = Nominal value of the title. d = Days elapsed between the date of the last interest payment and the settlement date. c = The rate resulting from the following formula, expressed in percent with rounding to two decimal places.

c = [ (1 + r_i)^(1/36000) - 1 ] x 36000 / N x Product from i=1 to N of (1 + r_i) (2)

Where:
N = Number of natural days elapsed between the date of the last interest payment and the settlement date. i = Refers to each of the natural days between the date of the last interest payment and the date of maturity of the interest period, taking values from 1 to N.
Product from i=1 to N = Operator meaning to perform the multiplication of the factors between parentheses. r_i = Annual interest rate, expressed in percent with rounding to two decimal places, at which credit institutions and brokerage houses carry out operations of sale and repurchase with a one-business-day term with banking titles, known in the market as "Weighted Interbank 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 said rate will be disseminated will be informed in due course.

In the event of a non-business day, the rate that was made known 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 sale and repurchase operations with a one-day term with banking titles. The Bank of Mexico will calculate the average of the two rates obtained for its determination and will make known the result in the manner and medium mentioned, as a substitute rate for the aforementioned one.

For the purposes of the Auctions, accrued but unpaid interest will be calculated up to the day of the Auctions. On the settlement day, the necessary adjustments will be made so that, with the quantity of titles fixed on the day of the Auctions, the accrued but unpaid interest up to the settlement date are incorporated with the corresponding "Weighted Interbank Funding Rate". This is given that said rate is not known on the date of the Auction.

7. GENERAL PROVISIONS

7.1 All times referred to in these Rules refer to the time zone of Mexico City, Federal District.

7.2 In the event that, due to force majeure or unforeseen circumstances, the results of the Auctions cannot be made known in accordance with section 5., the Bank of Mexico will promptly communicate the applicable procedure to make known the results of the Auctions.

APPENDIX 1
MODEL OF REQUEST TO PARTICIPATE IN THE PURCHASE AUCTIONS OF MONETARY REGULATION BONDS (BREMS).
REQUEST ON OWN ACCOUNT

Mexico, D.F., ____ of ____________ of 200__.
Bidder Name: _____________________________
Bidder Key at the Bank of Mexico: _____________________________

BIDS:
BREM Key Amount of BREMS to sell: in pesos:
XA__________ ____________________
XA__________ ____________________
XA__________ ____________________
XA__________ ____________________
XA__________ ____________________
XA__________ ____________________
XA__________ ____________________

The aforementioned bids are binding and irrevocable, will produce the broadest effects corresponding in law and imply our acceptance of the call and the "RULES FOR THE PURCHASE AUCTIONS OF MONETARY REGULATION BONDS (BREMS)" contained in Circular 8/2007 dated August 28, 2007, issued by the Bank of Mexico.

Sincerely,

(BIDDER NAME)
(NAME AND SIGNATURE OF AUTHORIZED OFFICIALS)

NOTE: The unused spaces in the "BIDS" section must be cancelled.

APPENDIX 2
MODEL OF INSTRUCTION LETTER TO CHARGE THE ACCOUNT OF CREDIT INSTITUTIONS OR BROKERAGE HOUSES 1

(LETTERHEAD OF THE CREDIT INSTITUTION OR BROKERAGE HOUSE)

Mexico, D.F., __ of ______ of 200_.

BANK OF MEXICO
Av. 5 de Mayo No. 6,
Col. Centro,
Mexico, D.F. 06059.
Attention: National Operations Processing Management.

(BIDDER NAME), authorizes and instructs irrevocably that Central Bank to make in the (Single Account or Cash Deposit Account) in national currency that that Bank holds for us, the credits that correspond for the settlement of the operations, as well as the charges that proceed for the payment of the conventional penalties that (BIDDER NAME) must cover in terms of what is provided in the "Rules for the Purchase Auctions of Monetary Regulation Bonds (BREMS)" contained in Circular 8/2007 dated August 28, 2007 issued by the Bank of Mexico.

Finally, we make known to you that the authorization referred to in this document can only be modified or revoked through written communication addressed to that Central Bank and presented with at least three banking business days in advance of the date on which the respective modification or revocation is intended to take effect.

Sincerely,

(BIDDER NAME)
(NAME AND SIGNATURE OF AUTHORIZED OFFICIALS)

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