Circular 11/2015 — Modifications to the Procedure for Acting as Market Makers for Government Securities

Monday, July 27, 2015 OFFICIAL GAZETTE (First Section) BANCO DE MEXICO CIRCULAR 11/2015, addressed to Credit Institutions and Brokerage Houses, regarding Modifications to the procedure for acting as market makers for government securities.

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

CIRCULAR 11/2015 TO CREDIT INSTITUTIONS AND BROKERAGE HOUSES: SUBJECT: MODIFICATIONS TO THE PROCEDURE FOR ACTING AS MARKET MAKERS FOR GOVERNMENT SECURITIES

The Bank of Mexico, in its capacity as the financial agent of the Federal Government –and in response to the modifications that the Ministry of Finance and Public Credit, through letter number 305.-059/2015, dated the 1st of the current month, has resolved to carry out on the procedure to which credit institutions and brokerage houses acting as market makers regarding government securities referred to in letter number 305.-027/2011 of said Ministry, made known by this Central Bank through its Circular 5/2011, dated February 14, 2011, as modified since that date– attaches to the present copy of the cited letter No. 305.-059/2015, in order to make its content known to these entities, for the effects indicated therein.

The above is carried out based on articles 28, paragraphs sixth and seventh, of the Political Constitution of the United Mexican States, 3, fraction III, 7, fraction I, and 10 of the Bank of Mexico Law, 22 of the Law for Transparency and Order of Financial Services, as well as 4, first paragraph, 8, paragraphs fourth and seventh, 10, first paragraph, 12, first paragraph, in relation to 19 Bis, fraction V, and 14 Bis, first paragraph, in relation to 17, fraction I, 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 and the General Legal Directorate, respectively, as well as Second, fractions VI and X, of the Agreement on the Affiliation of the Administrative Units of the Bank of Mexico.

Mexico, D.F., July 21, 2015.- The General Director of Central Bank Operations, Jaime José Cortina Morfín.- Rubric.- The General Legal Director, Luis Urrutia Corral.- Rubric.

For any inquiries regarding the content, please contact the Management of Authorizations, Consultations and Legal Control, at the phones (55) 5237-2308, (55) 5237-2317 or (55) 5237-2000 Ext. 3200.

(First Section) OFFICIAL GAZETTE Monday, July 27, 2015

“On the margin a seal with the National Coat of Arms, stating: United Mexican States.- Ministry of Finance and Public Credit.- Undersecretariat of Finance and Public Credit.- Public Credit Unit.- Letter No. 305.-059/2015. Mexico, D.F., July 1, 2015 LIC. JAIME JOSÉ CORTINA MORFÍN GENERAL DIRECTOR OF CENTRAL BANK OPERATIONS BANK OF MEXICO PRESENT.

The Ministry of Finance and Public Credit, through the Public Credit Unit, based on articles 4th, fractions I and V of the General Public Debt Law; 3rd, fraction III, 7th, fraction I, 8th and 10 of the Bank of Mexico Law; 17 fractions VIII, X and XXI of the Internal Regulations of the Ministry of Finance and Public Credit; Sole, fractions V and VII of the Decree authorizing the Federal Executive to issue Certificates of the Treasury of the Federation, published in the Official Gazette of the Federation (DOF) on July 8, 1993; 1st, fraction VI, 2nd and 3rd of the Decree authorizing the Ministry of Finance and Public Credit to issue Federal Government Development Bonds, published in the DOF on September 22, 1987, modified by Decree published in the DOF on September 9, 1998; 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, published in the DOF on April 1, 1995 modified by Decree published in the DOF on December 7, 2009 and article 20 Ter of the Federal Tax Code, considers it convenient to continue fostering the development of the market for Federal Government Development Bonds with Fixed Interest Rate (BONOS) and those denominated in Investment Units (UDIBONOS).

Therefore, it has decided to modify Letter 305.-027/2011 dated January 27, 2011, modified by Letters 305.-105/2011 dated July 26, 2011, 305.-178/2011 dated November 18, 2011, 305.-023/2012 dated February 9, 2012, 305.-085/2012 dated July 3, 2012, 305.-010/2014 dated February 7, 2014 and Letter 305.-035/2014 dated May 14, 2014, in its sections 4.2.7, 7.2.5, 7.2.6 and its Annexes 1, 2 and 4, as well as adding Annex 5, in order to: (i) reduce from forty to thirty-five percent the limit of the risk position that Market Makers and UDIBONOS Market Makers can have regarding an issuance of BONOS and UDIBONOS, to be able to carry out securities lending operations with the Bank of Mexico, (ii) homogenize the calculation methodology of the premium that UDIBONOS Market Makers must pay in securities lending operations, with that applicable to Market Makers, and (iii) modify the calculation methodology of the UDIBONOS Activity Index in order to weight the volume traded in UDIBONOS by the duration of said instruments; to remain in the following terms:

4. RIGHTS OF MARKET MAKERS. . . .

“4.2.6 Market Makers shall pay the Bank of Mexico a premium for each securities lending operation they conclude. The amount of said premium will be obtained by multiplying the weighted government funding rate, which the Bank of Mexico calculates and makes known daily through its website www.banxico.org.mx or any other electronic, computing or telecommunications medium authorized for this effect by said Bank, by a factor that will be determined in accordance with what is specified in Annex 4 of this Letter.

The Bank of Mexico, in its capacity as the financial agent of the Federal Government, will be responsible for calculating this factor monthly starting on the 16th of each month and concluding on the 15th of the following month, to be applied from the first Business Day of the next calendar month. In case any of the mentioned days is not a business day for Financial Intermediaries, the immediate subsequent Business Day will be taken into account for the start day and the immediate preceding Business Day for the end day of the period. For such purposes, Applicants and Market Makers must send to the Bank of Mexico, in the terms determined by said Central Institute, the necessary information to measure the operability of each of them in the repo and securities lending markets. Likewise, the Bank of Mexico will inform each Market Maker monthly of the factor that will be applied to the weighted government funding rate during the following month to calculate the corresponding premium, at least three Business Days before the end of each month, through some electronic, computing or telecommunications medium authorized for such effect by said Bank. …”

“4.2.7 The right to carry out securities lending operations on CETES and BONOS with the Bank of Mexico will be suspended to those Market Makers whose Proportional Long Net Position in any of the issuances of BONOS and UDIBONOS averages 35% (thirty-five percent) or more of this percentage in monthly periods in accordance with what is stated in section 4.2.6 of this letter. Market Makers that exceed this limit will be notified by the Bank of Mexico. The suspension will take effect on the third Business Day counted from the Business Day following that on which the Market Makers in question receive the said notification through some electronic, computing or telecommunications medium authorized for such effect by said Bank. The suspension will be lifted on the first Business Day of the month immediately following that in which it maintains for two consecutive measurement periods an average less than 35% (thirty-five percent) in each of the months in the Proportional Long Net Position in all issuances of BONOS and UDIBONOS.”

7. RIGHTS OF UDIBONOS MARKET MAKERS. . . .

“7.2.5 UDIBONOS Market Makers shall pay the Bank of Mexico a premium for each securities lending operation they conclude. The amount of said premium will be the result of multiplying the weighted government funding rate, which the Bank of Mexico calculates and makes known daily through its website www.banxico.org.mx or any other electronic, computing or telecommunications medium authorized for this effect by said Bank, by a factor that will be determined in accordance with what is specified in Annex 5 of this Letter.

The Bank of Mexico, in its capacity as the financial agent of the Federal Government, will be responsible for calculating the factor referred to in the previous paragraph monthly, starting on the 16th of each month and concluding on the 15th of the following month, to be applied from the first Business Day of the next calendar month. In case any of the mentioned days is not a business day for Financial Intermediaries, the immediate subsequent Business Day will be taken into account for the start day, and the immediate preceding Business Day for the day on which the referred period concludes. For such purposes, UDIBONOS Market Makers must send to the Bank of Mexico, in the terms determined by said Central Institute, the necessary information to measure the operability of each of them in the repo and securities lending markets. Likewise, the Bank of Mexico will inform each UDIBONOS Market Maker monthly of the factor that will be applied to the weighted government funding rate during the following month to calculate the corresponding premium, at least three Business Days before the end of each month, through some electronic, computing or telecommunications medium authorized for such effect by said Bank.”

“7.2.6 The right to carry out securities lending operations on UDIBONOS with the Bank of Mexico will be suspended to those UDIBONOS Market Makers whose Proportional Long Net Position in any of the issuances of BONOS and UDIBONOS averages 35% (thirty-five percent) or more of this percentage in monthly periods in accordance with what is stated in section 7.2.5 of this letter. UDIBONOS Market Makers that exceed this limit will be notified by the Bank of Mexico. The suspension will take effect on the third Business Day counted from the Business Day following that on which the Market Makers in question receive the said notification through some electronic, computing or telecommunications medium authorized for such effect by said Bank. The suspension will be lifted on the first Business Day of the month immediately following that in which it maintains for two consecutive measurement periods an average less than 35% (thirty-five percent) in each of the months in the Proportional Long Net Position in all issuances of BONOS and UDIBONOS.”

(First Section) OFFICIAL GAZETTE Monday, July 27, 2015

“ANNEX 1 CALCULATION OF THE MARKET MAKER INDEX The Market Maker Index (MMI) is the sum of the Activity Index (AI) plus incentives minus penalties for the Diversification Index (DI), plus incentives for Positions and Operation in MexDer (OM), plus other incentives and penalties that, according to section 4.3 of this Letter, the Ministry determines.

The MMI will be the result of the following formula: MMI = AI + incentives – penalties

The calculation methodology of the MMI is described below:

I. ACTIVITY INDEX (AI) Corresponds to the market participation in the nominal volume weighted by duration traded directly in CETES and BONOS. The [formula for AI] for the intermediary is defined by: [Formula]: Market participation of the intermediary in the volume traded directly in CETES and BONOS, in the considered segments, for the period defined in section 2.4 of this Letter. To consider the risk of operating issuances of different terms, the nominal volume is multiplied by the duration1 of the instrument. The Bank of Mexico may exclude from the calculation the operations referred to in section 2.3 of this Letter.

1 Macaulay duration will be used.

(First Section) OFFICIAL GAZETTE Monday, July 27, 2015

II. DIVERSIFICATION INDEX (DI). Indicates the average number of BONOS issuances in which each intermediary diversifies its operation. [Diversification Index formula]: Diversification index for the intermediary in the direct operation of BONOS through Brokerage Houses (Brokers) and the operation with clients other than banks or brokerage houses through any medium during the measurement period defined in section 2.4 of this Letter. When an intermediary does not operate BONOS issuances, its diversification index takes the value of zero. The Bank of Mexico may exclude from the calculation the operations referred to in section 2.3 of this Letter.

For the calculation of the DI, all BONOS issuances will be considered except the two issuances that present a higher average Turnover Index in the measurement period defined in section 2.4 of this Letter. The average of the Turnover Index is calculated based on the sum of the Turnover Indices during the measurement period, divided by the number of business days of the measurement period. These issuances will be made known to the Market Makers by the Ministry 3 business days before the end of the calendar month through its internet portal or any other means of communication it deems convenient.

Range of % of active issuances Incentive / Penalty From To (Basis Points) 70% 100% 150 60% 70% 100 50% 60% 50 40% 50% 0 0% 40% -30

III. INCENTIVES FOR POSITIONS IN MEXDER Will correspond to the assignment of points that MexDer, in accordance with the evaluation it carries out for this effect, makes regarding the Positions of each Market Maker and Applicant according to the following methodology: • MexDer will take daily 40 samples of the Positions presented during the negotiation period of the day in question. For such purposes, only those Positions with a minimum volume of 100 contracts for BONOS futures and 1,000 for CETES futures will be considered.

(First Section) OFFICIAL GAZETTE Monday, July 27, 2015

• For each sample, points will be assigned in accordance with the following criteria: a) If the differential between the best Buy Position and the best Sell Position of the Market Makers or Applicants is equal to the differential in MexDer, 10 Points will be assigned in MexDer. b) If the differential between the best Buy Position and the best Sell Position of the Market Makers or Applicants is less than the differential in MexDer, 15 Points will be assigned in MexDer. c) If the differential between the best Buy Position and the best Sell Position of the Market Makers or Applicants is greater than the differential in MexDer, 3 Points will be assigned in MexDer. d) If Market Makers or Applicants have exclusively Buy or Sell Positions, 3 Points will be assigned in MexDer. e) To those Market Makers or Applicants whose best Buy and Sell Positions meet the differential in MexDer and have the smallest differential in the sample, an additional 10 Points will be assigned in MexDer.

For the purposes of the above subsections, the differential in MexDer will correspond to that for the different classes of futures determined by MexDer and published on its internet website identified with the domain name: www.mexder.com.mx. The cited differential will correspond to that required in stable market, unless the Bank of Mexico determines that it will correspond to the differential required in volatile market, for which it may request the opinion of MexDer.

Market Makers and Applicants who obtain, in accordance with the information that MexDer provides to the Bank of Mexico, a minimum daily average of 500 Points in MexDer during the measurement period defined in section 2.4 of this Letter, will be entitled to 40 basis points.

On the other hand, Market Makers who throughout the cited measurement period have obtained the highest scores will receive additional points in accordance with the following table:

Rank in Measurement Incentive (bp) First place 30bp Second place 20bp Third place 10bp

In case of a tie, priority will be given to Market Makers with greater volume of Operation in MexDer in said measurement period.

MexDer will report to the Bank of Mexico within two business days following the 15th day of the measurement period the number of Points in MexDer obtained by each of the Market Makers and Applicants.

(First Section) OFFICIAL GAZETTE Monday, July 27, 2015

(First Section) OFFICIAL GAZETTE Monday, July 27, 2015

(First Section) OFFICIAL GAZETTE Monday, July 27, 2015

(First Section) OFFICIAL GAZETTE Monday, July 27, 2015

(First Section) OFFICIAL GAZETTE Monday, July 27, 2015

TRANSITIONAL PROVISIONS FIRST.- The provisions of this Letter will enter into force on September 16, 2015, except for what is provided in the following article. SECOND.- The modifications to Annex 2, contained in this Letter, will enter into force on September 16, 2015.

Respectfully, The Head of the Public Credit Unit, Alejandro Díaz de León Carrillo.- Rubric.