Circular 11/2007 — Modifies Circular 2/2005

CIRCULAR 11/2007 Mexico, D.F., September 24, 2007. TO CREDIT INSTITUTIONS, SECURITIES COMPANIES, INVESTMENT COMPANIES AND SPECIALIZED INVESTMENT COMPANIES FOR RETIREMENT FUNDS. SUBJECT: MODIFICATIONS TO THE RULES FOR THE SWAP OF FIXED-RATE FEDERAL GOVERNMENT DEVELOPMENT BONDS.

The Bank of Mexico, in its capacity as financial agent of the Federal Government, based on the provisions of Article 28, paragraphs six and seven, of the Political Constitution of the United Mexican States; Articles 7, fraction I, 8, 14, and 24 of the Bank of Mexico Law; Article 22 of the Law for Transparency and Order of Financial Services; Articles 8, 10, 17, fraction I, and 19, fraction IX 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 said Official Gazette on April 26, 2007; Article Unique, fractions I and IV of the Agreement on the Assignment of Administrative Units of the Bank of Mexico, published in the Official Gazette of the Federation on October 15, 1998, whose last modification was published in said Official Gazette on April 26, 2007; as well as in Office No. 305.-126/2007 dated September 21, 2007, by which the Secretariat of Finance and Public Credit instructs this Central Institute to carry out, in its capacity as financial agent of the Federal Government, the necessary acts so that in the auctions for the swap of Fixed-Rate Federal Government Development Bonds issued in pesos (Bonds), only bidders with a net long position less than or equal to 60% of the total outstanding amount of the Bonds involved in the swap on the day of the auction may participate, with the objective of: a) Avoiding unfair trading practices of the Bonds; b) Favoring fair competition among financial intermediaries and different market participants; c) Promoting greater liquidity and increasing efficiency in the price formation process of available instruments; and d) Encouraging the use of international best practices in the trading of securities issued by the Federal Government.

For the above reason, it has resolved to modify the first paragraph of the Rules, paragraphs three of numeral 1., fourth and fifth paragraphs of numeral 8.2, as well as to add a fourth paragraph to numeral 1. and a second paragraph to numeral 5.2, all of the “RULES FOR THE SWAP OF FIXED-RATE FEDERAL GOVERNMENT DEVELOPMENT BONDS”, contained in Circular 2/2005, dated September 29, 2005, to read as follows:

“For brevity, in these Rules, the following shall be designated as: Bonds: Fixed-Rate Federal Government Development Bonds issued in pesos, subject to swaps, and Net Long Position: a) the sum of the own position plus securities to be received by repo or securities lending minus securities to be delivered by repo or securities lending.”

1. Bidders.

“... The person who has a Net Long Position, at nominal value, equal to or greater than 60% of the outstanding amount of the Bonds subject to the swap, must abstain from submitting bids. 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.”

5. Bids. 5.2 Limit of Bids.

“... In the case of multiple banking institutions and securities companies that are part of the same financial group or that are controlled by the same shareholder, for the determination of the Net Long Position, the sum of the position of each of them shall be considered. For the purposes of the foregoing, it shall be understood that the same shareholder controls a multiple banking institution and a securities company when it is the owner of thirty percent or more of the shares representing the social capital of both intermediaries; has control of their general shareholders' meetings, is in a position to appoint the majority of the members of their boards of directors, or by any other means controls the multiple banking institution and the securities company in question.”

8. Settlement of Auctions 8.2 . . .

“Bidders who: i) do not have all the Bonds that must be delivered in the account designated in the time frame referred to in the previous paragraph, or ii) submit bids in contravention of what is provided in the third paragraph of numeral 1 of these Rules, must cover the corresponding conventional penalties as established in the following paragraph. In the case referred to in subsection i) above, the Bank of Mexico may, without the need for a judicial declaration, rescind the swap for the missing amount, so that the corresponding credits and debits will not be made in the securities accounts at Indeval. Without prejudice to the above, the Bank of Mexico in both cases may disqualify the respective bidder from participating in the Auctions. The amount of the conventional penalty referred to in the previous paragraph shall be equivalent to one percent: i) of the nominal amount of the Bonds that have not been delivered to the Federal Government, or ii) of the nominal amount of the Bonds corresponding to the bids submitted, respectively. This penalty will be charged on the same date of settlement of the Auction by the Bank of Mexico in the account that the Bank itself maintains for the defaulting bidder or for the institution or securities company authorized by said bidder in terms of “Appendix 2”.”

TRANSITORY UNIQUE.- These Rules shall enter into force on September 25, 2007.