Circular 1/2021 — Extends the Validity of Measures to Promote Orderly Financial Market Behavior, Strengthen Credit Channels, and Provide Liquidity

DIARIO OFICIAL Friday, February 26, 2021 BANK OF MEXICO CIRCULAR 1/2021 addressed to Multiple Banking Institutions and Development Banks, regarding the extension of the validity of facilities to promote orderly behavior in financial markets, strengthen credit granting channels, and provide liquidity for the sound development of the financial system.

A logo appears at the margin, stating: Bank of Mexico. - “2021: Year of Independence”.

CIRCULAR 1/2021 TO MULTIPLE BANKING INSTITUTIONS AND DEVELOPMENT BANKS: SUBJECT: EXTENSION OF THE VALIDITY OF FACILITIES TO PROMOTE ORDERLY BEHAVIOR IN FINANCIAL MARKETS, STRENGTHEN CREDIT GRANTING CHANNELS, AND PROVIDE LIQUIDITY FOR THE SOUND DEVELOPMENT OF THE FINANCIAL SYSTEM.

The Bank of Mexico, with the objective of continuing to promote the sound development of the financial system and safeguard its stability, as well as to foster the proper functioning of payment systems and avoid disruptions therein, in consideration of the impacts that the COVID-19 pandemic has had on the global economy, on the behavior of our country's financial markets, as well as on foreign exchange and fixed-income markets, which showed little depth, lower liquidity, and a deterioration in operating conditions, in accordance with the announcement published on April 21, 2020, deemed it necessary to issue a set of measures in order to promote orderly behavior in financial markets, strengthen credit granting channels, and provide liquidity for the sound development of the financial system, with the objective that conditions exist that facilitate credit institutions in fulfilling their priority function of providing financing to the economy.

In this regard, since their entry into force, these measures have contributed to fostering more orderly market behavior by providing, through credit institutions, additional liquidity support to the financial system. Likewise, the measures implemented for the benefit of fixed-income and foreign exchange markets have also contributed to a more orderly evolution in said markets, and have supported the recovery in the performance of the assets that compose these same markets.

Without prejudice to the fact that financial markets in our country have shown stability since the second half of 2020 and into 2021, associated with the development of preventive health measures against COVID-19, and to the expectation that these could improve the pace of economic recovery in 2021, some risks associated with different factors and events in the short and medium term for the Mexican economy and financial system still prevail. Likewise, the materialization of some of these risks or adverse scenarios could result in a new episode of financial volatility and portfolio rebalancing, which in turn would be reflected in a deterioration of the liquidity and operating conditions of our markets.

Consequently, considering the benefits of the facilities and the risks that prevail, and with the objective of continuing to promote orderly behavior in financial markets and reduce potential stress conditions that could arise from the described factors, the Bank of Mexico seeks to maintain a preventive approach regarding the possibility of observing adverse conditions in the functioning of the country's markets; therefore, it has determined to extend, until September 30, 2021, the validity of the support measures announced on April 21, 2020, under the terms described below.

For the above, based on Articles 25, second paragraph, 28, sixth and seventh paragraphs, of the Political Constitution of the United Mexican States; 7, fractions I, II, and X, 8, 14, first paragraph, 15, 16, 24, 26, first paragraph, 28, and 36, of the Bank of Mexico Law; 53, 54, 81, and 96 Bis, of the Credit Institutions Law; 22, of the Law for Transparency and Orderly Conduct of Financial Services; 4, first paragraph, 8, fourth and eighth paragraphs, 10, 12 Bis, first paragraph, in relation to 20 Ter, fraction II, and 20 Quáter, fractions II and IV, 14, first paragraph, in relation to 25, fraction VII, 17, fraction I, 14 Bis 1, first paragraph, in relation to 25 Bis 1, fraction IV, and 19 Bis 1, fraction XI, of the Internal Regulations of the Bank of Mexico, which grant it the authority to issue provisions through the General Directorate of Payment Systems and Market Infrastructures, the General Directorate of Financial Stability, the Directorate of Central Banking Provisions, the General Directorate of Financial System Affairs, and the Directorate of Operational Support, respectively; as well as Second, fractions I, IV, VI, X, and XVII, of the Agreement on the Affiliation of Administrative Units of the Bank of Mexico, it has resolved the following:

FIRST. The transitional rules SECOND and THIRD, and the transitional rule FIRST BIS of the “Modifications to Circular 10/2015 (Rules Applicable to the Exercise of Financing Granted by the Bank of Mexico to Cover Additional Ordinary Liquidity Needs)”, issued by the Bank of Mexico through Circular 15/2020, published in the Official Gazette of the Federation on May 13, 2020, and modified by Circulares 35/2020 and 43/2020, published in said dissemination medium on September 28, 2020, and November 4 of the same year, respectively, are modified, to read as follows:

TRANSITIONAL PROVISIONS

“FIRST BIS. The provisions of Rule 1. Definitions. “Institutions”, of the “Rules applicable to the exercise of financing granted by the Bank of Mexico to cover additional ordinary liquidity needs”, contained in Circular 10/2015 cited, shall only be applicable during the period elapsed from the entry into force of this Circular until February 28, 2021. In virtue thereof, from March 1, 2021, Rule 1. Definitions. “Institutions” shall be modified as follows:

“1. Definitions. … Institutions: to multiple banking institutions.”

“SECOND. The provisions of Rule 1. Definitions. “Global Credit Quality Criterion” and “National Credit Quality Criterion”, Rule 2.1. Conditions for granting financing, third paragraph, and Rule 2.3. Repurchase operations, sub-clauses “a” and “c” of item ii) under the heading “Securities Subject to Repurchase” shall only be applicable during the period elapsed from the entry into force of this Circular until September 30, 2021. In virtue thereof, from October 1, 2021, Rule 1. Definitions. “Global Credit Quality Criterion” and “National Credit Quality Criterion”, Rule 2.1. Conditions for granting financing, third paragraph, and Rule 2.3. Repurchase operations, sub-clauses “a” and “c.” of item ii) under the heading “Securities Subject to Repurchase” shall be modified as follows:

1. Definitions. Global Credit Quality Criterion: … National Credit Quality Criterion: … 2.1 Conditions for granting financing…”

“THIRD. In the event that, by September 30, 2021, any Institution has entered into a repurchase agreement with the Bank of Mexico, in accordance with these Rules, regarding the securities indicated in numeral 2.3, item ii), sub-clause “c.”, which is modified in accordance with the preceding Transitional Rule, and said repurchase remains valid on that date, the parties may carry out the renewal of said operation with those same securities in accordance with these Rules.”

SECOND. The transitional rule FIRST of the “Rules applicable to securities lending operations with the Bank of Mexico to improve liquidity”, issued by the Bank of Mexico through Circular 16/2020, published in the Official Gazette of the Federation on May 19, 2020, and modified by Circular 35/2020, published in said dissemination medium on September 28 of the same year, is modified, to read as follows:

TRANSITIONAL PROVISIONS

“FIRST.- These Rules shall enter into force on the day of their publication in the Official Gazette of the Federation and their validity shall expire on September 30, 2021.”

THIRD. The transitional rule FIRST of the “Rules applicable to repurchase operations of government securities with the Bank of Mexico to cover liquidity needs”, issued by the Bank of Mexico through Circular 17/2020, published in the Official Gazette of the Federation on May 19, 2020, and modified by Circulares 20/2020 and 35/2020, published in said dissemination medium on June 2, 2020, and September 28 of the same year, respectively, is modified, to read as follows:

TRANSITIONAL PROVISIONS

“FIRST. These Rules shall enter into force on the day of their publication in the Official Gazette of the Federation and their validity shall expire on September 30, 2021.”

FOURTH. The first paragraph of the section “Allowed Extensions and Renewals” of numeral 2.2 and the transitional rule FIRST BIS of the “Rules applicable to repurchase operations of corporate securities with the Bank of Mexico to cover liquidity needs”, issued by the Bank of Mexico through Circular 18/2020, published in the Official Gazette of the Federation on May 19, 2020, and modified by Circulares 29/2020 and 35/2020, published in said dissemination medium on July 23, 2020, and September 28 of the same year, respectively, are modified, to read as follows:

“2.2 Repurchase Operations. … … Allowed Extensions and Renewals: The repurchase entered into for the first time, in accordance with what is indicated in the section “Term for entering into the repurchase operation” of this numeral 2.2, may be extended or renewed, one or more times, at the request of the reporting Institution, for terms and characteristics equal to those of said repurchase, provided that said original repurchase was entered into by the Institution, on its own account or on behalf of any of the third parties referred to in the preceding numeral 2.1, with securities provided for in this numeral 2.2 that were issued, in national currency or in UDIS, between July 16, 2020, and until September 30, 2021, and update any of the following circumstances: …”

TRANSITIONAL PROVISIONS

“FIRST BIS. … I. Until September 30, 2021, regarding any of the securities described in the section “Securities Subject to Repurchase” included in numeral 2.2 of these Rules; II. Until December 31, 2021, only regarding any of the securities that were issued, in national currency or in UDIS, after July 16, 2020, and until September 30, 2021, and fall under the circumstance in item i) of the section “Allowed Extensions and Renewals” included in numeral 2.2 of these Rules, and III. Until June 30, 2023, only regarding any of the securities that were issued, in national currency or in UDIS, after July 16, 2020, and until September 30, 2021, and fall under the circumstance in item ii) of the section “Allowed Extensions and Renewals” included in numeral 2.2 of these Rules.”

FIFTH. The transitional rule SECOND of the “Rules applicable to the provision of resources to Credit Institutions to channel credit to micro, small, and medium-sized enterprises, as well as to natural persons”, issued by the Bank of Mexico through Circular 20/2020, published in the Official Gazette of the Federation on June 2, 2020, and modified through Circulares 30/2020, 33/2020, and 35/2020, published in said Gazette on August 19, September 11, and September 28 of the same year, respectively, is modified, to read as follows:

TRANSITIONAL PROVISIONS

“SECOND. The validity of the Rules Applicable to the Provision of Resources to Credit Institutions to Channel Credit to Micro, Small, and Medium-Sized Enterprises, as well as to Natural Persons, provided for in the First Resolutivo of this Circular, shall expire on September 30, 2021. In the event that, on the date of expiration of the stated validity, repurchases entered into by the Institutions with the Bank of Mexico in accordance with said Rules remain in force, these shall remain valid until the date of their settlement, subject to these provisions and the applicable contracts.”

SIXTH. The transitional rule FIRST of the “Rules Applicable to Bank of Mexico Financings Guaranteed by Qualified Credit Assets of the Banking Sector, for their channeling to Micro, Small, and Medium-Sized Enterprises”, issued by the Bank of Mexico through Circular 25/2020, published in the Official Gazette of the Federation on June 19, 2020, and modified by Circulares 31/2020, 32/2020, 34/2020, and 35/2020, published in said dissemination medium on August 19 and 27, as well as September 11 and 28 of the same year, respectively, is modified, to read as follows:

TRANSITIONAL PROVISIONS

“FIRST. This Circular shall enter into force on the day of its publication in the Official Gazette of the Federation and its validity shall expire on September 30, 2021.”

TRANSITIONAL PROVISION

UNIQUE. This Circular shall enter into force on the day of its publication in the Official Gazette of the Federation.

Mexico City, February 23, 2021.- BANK OF MEXICO: The General Director of Payment Systems and Market Infrastructures, Manuel Miguel Ángel Díaz Díaz.- Signature.- The General Director of Financial Stability, Fabrizio López Gallo Dey.- Signature.- The Director of Central Banking Provisions, María Teresa Muñoz Arámburu.- Signature.- The General Director of Financial System Affairs, José Luis Negrín Muñoz.- Signature.- The Director of Operational Support, Joaquín Rodrigo Cano Jauregui Segura Millan.- Signature.

Friday, February 26, 2021 OFFICIAL GAZETTE

For any inquiries regarding the content of this Circular, the Bank of Mexico is at your disposal through the Directorate of Central Banking Authorizations and Sanctions at telephone (55) 5237-2000 extension 3200.