Circular 11/2021 — Modifications to the Procedure for Acting as Market Makers for Government Securities

Monday, December 27, 2021 OFFICIAL GAZETTE BANK OF MEXICO CIRCULAR 11/2021 addressed to Credit Institutions and Brokerage Houses, regarding Modifications to the procedure for acting as Market Makers for Government Securities.

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

CIRCULAR 11/2021 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 Office No. 305.- 594/2021, dated December 20, 2021, has resolved to carry out on the procedure that credit institutions and brokerage houses acting as market makers regarding government securities referred to in Office No. 305.-027/2011 of said Ministry, made known by this Central Bank through its Circular 5/2011, dated February 14, 2011, as well as the modifications to said procedure issued subsequently-attached to the present copy of the cited Office No. 305.-594/2021, in order to make the content thereof known to those entities, for the effects indicated therein.

The foregoing, based on what is provided in 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 Ordering of Financial Services, 8, paragraphs fourth and eighth, 10, first paragraph, 12, first paragraph, in relation to 19 Bis, fraction V, and 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 Directorate of Central Bank Provisions, respectively, as well as Second, fractions VI and X, of the Agreement on the Attachment of the Administrative Units of the Bank of Mexico.

Mexico City, December 22, 2021.- General Director of Central Bank Operations, Gerardo Israel García López.- Rubric.- Director of Central Bank Provisions, María Teresa Muñoz Arámburu.- Rubric.

For any queries regarding the content of this Circular, please contact the Directorate of Authorizations and Sanctions of Central Bank, at telephone numbers 55 5237-2308, 55 5237-2317 or 55 5237-2000, extension 3200.

Ministry of Finance and Public Credit Public Credit Unit Office No. 305.-594/2021 Mexico City, December 20, 2021

GERARDO ISRAEL GARCÍA LOPEZ GENERAL DIRECTOR OF OPERATIONS OF CENTRAL BANK BANK OF MEXICO

OFFICIAL GAZETTE Monday, December 27, 2021 Present.

The Ministry of Finance and Public Credit, through the Public Credit Unit, based on articles 31, fractions V and VI of the Organic Law of the Federal Public Administration; 4th, fractions I and V of the Federal 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 Treasury Certificates 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 add a fraction XXIX Bis in numeral 1, as well as modify numerals 2.5, subsections a) and b), 4.1.1, 4.1.2, 4.1.3, 4.2.3, 4.2.7, and Annex 3, of Office 305.-027/2011 dated January 27, 2011, modified by Offices 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, 305.-035/2014 dated May 14, 2014, 305.-059/2015 dated July 1, 2015, 305.-033/2017 dated February 28, 2017, 305.-053/2017 dated March 30, 2017, 305.-156/2017 dated December 29, 2017, and 305-200/2020 dated March 25, 2020, to read as follows:

“1. DEFINITIONS … I. to XXIX … XXIX Bis.- Syndicated Auctions: the auctions for placement in the primary market of BONOS and UDIBONOS, as applicable, in which Market Makers or UDIBONOS Market Makers participate, which shall be conducted in accordance with the “Rules for the Holding of Syndicated Auctions of Government Securities”, or those that replace them, issued by the Bank of Mexico. ”

“2. MARKET MAKERS AND UDIBONOS MARKET MAKERS 2.1 to 2.4 … 2.5 … a) On the first Business Day of each month, Applicants whose IFM or IFMU, respectively, calculated in accordance with what is provided in this Office, in each of the three immediately preceding measurement periods, has been equal to or greater than 5%, may be incorporated as Market Makers or UDIBONOS Market Makers. b) On the first Business Day of each month, those whose IFM or IFMU, as applicable, calculated in accordance with what is provided in this Office, corresponding to the immediately preceding measurement period, is less than 5%, shall cease to operate as Market Makers or UDIBONOS Market Makers. …”

“4. RIGHTS … 4.1.1 The maximum amount of CETES and BONOS, or UDIBONOS, that Market Makers or UDIBONOS Market Makers, respectively, may acquire collectively, shall be 35% of the total amount assigned in the Auctions and Syndicated Auctions for each of the terms of CETES and BONOS, or UDIBONOS. 4.1.2 The maximum amount of CETES and BONOS, or UDIBONOS, that each Market Maker or UDIBONOS Market Maker, respectively, may request in exercise of the purchase right, shall be the lesser of: a) 35% of the total amount assigned in the Auctions and Syndicated Auctions for each of the terms of CETES and BONOS, or UDIBONOS, and b) the total amount of computable bids presented by the Market Maker or UDIBONOS Market Maker in question in the Auctions and Syndicated Auctions for each of the terms of CETES and BONOS or UDIBONOS.

Monday, December 27, 2021 OFFICIAL GAZETTE A bid shall be considered computable for each Market Maker or UDIBONOS Market Maker, that whose yield rate is less than or equal to the product of multiplying the highest yield rate that has received allocation in the Auctions and Syndicated Auctions for each of the terms of CETES and BONOS, or UDIBONOS, as applicable, by the corresponding factor from those indicated below: a) To that which registered the highest level of IFM or IFMU, 1.0035 or 1.0115, respectively. b) To that which had the second highest level of IFM or IFMU, 1.0030 or 1.0110, respectively. c) To the third highest level of IFM or IFMU, 1.0025 or 1.0105, respectively. d) For other Market Makers or UDIBONOS Market Makers, 1.0020 or 1.0100, respectively. The factors mentioned in subsections a), b), c) and d) above, shall be applied during the respective month to the Market Makers or UDIBONOS Market Makers concerned in accordance with the order in which they appear in the list made known by the Ministry in terms of the second paragraph of numeral 8.2. If the aggregate demand of all Market Makers or UDIBONOS Market Makers, as applicable, through the exercise of this purchase right results in greater than 35% of the total amount assigned to each of the Auctions and Syndicated Auctions, the procedure indicated in Annex 3 shall be followed. 4.1.3 Market Makers or UDIBONOS Market Makers wishing to exercise their purchase option, between 8:45:00 hours and 9:00:00 hours on the second Business Day following the publication of the results of the Auctions and Syndicated Auctions, must inform the Bank of Mexico on that same Business Day, through the means authorized for such purpose, of the amount of CETES and BONOS, or UDIBONOS, they wish to purchase, respectively. In the event that, due to force majeure or fortuitous event, the aforementioned means are not available, the Bank of Mexico will communicate to them the procedure and schedule in which they may exercise their purchase right. 4.1.4 … [Repealed] 4.2… 4.2.1 to 4.2.2 … 4.2.3 Each Market Maker or UDIBONOS Market Maker may request from the Bank of Mexico any issuance of CETES, BONOS or UDIBONOS currently in the market on loan, up to an equivalent of 2% of the total Outstanding Balance by Primary Operations of said CETES, BONOS or UDIBONOS and up to 4% of the Outstanding Balance by Primary Operations of each of the issuances of CETES, BONOS or UDIBONOS. Regarding BONOS or UDIBONOS that have been placed through a Syndicated Auction, Market Makers and UDIBONOS Market Makers may request said BONOS or UDIBONOS on loan, starting from the Business Day following that on which the settlement of said Syndicated Auction takes place. 4.2.4 to 4.2.6 … 4.2.7 The Bank of Mexico, at least four Business Days prior to the end of the month, will notify, through the electronic, computing or telecommunications medium authorized for such purpose by said Bank, to the Market Maker or UDIBONOS Market Maker, 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 numeral 4.2.6 of this Office. Through said notification, the Market Maker or UDIBONOS Market Maker in question will be informed that, starting from the first Business Day of the month immediately following that in which the notification is carried out, their right to carry out securities lending operations with the Bank of Mexico on CETES, BONOS and UDIBONOS will be suspended. The suspension will remain in effect until the first Business Day of the month immediately following that in which an average of less than 35% (thirty-five percent) is maintained for two consecutive measurement periods in each of the months in the Proportional Long Net Position in all issuances of BONOS and UDIBONOS.

The tenth Business Day following that on which the suspension referred to in the previous paragraph takes effect, the Bank of Mexico will declare prematurely mature the entirety of the securities lending operations that it maintains active with the Market Maker or UDIBONOS Market Maker in question.

The Bank of Mexico will notify the Market Maker or UDIBONOS Market Maker in question, as well as the Ministry, of the premature maturity referred to in the previous paragraph, through some electronic, computing or telecommunications medium authorized for such purpose by the Bank of Mexico, at least one Business Day in advance of the date on which the Market Maker or UDIBONOS Market Maker in question must settle the securities lending operations indicated by the Bank of Mexico for such effect.

As an exception to what is provided in the first paragraph of this numeral, in those cases where, as a consequence of liability management operations carried out by the Ministry, the amount of BONOS or UDIBONOS placed in the market is modified and this leads to a certain Market Maker or UDIBONOS Market Maker maintaining a Proportional Long Net Position in any of the issuances of BONOS and UDIBONOS that averages 35% (thirty-five percent) or more in monthly periods in accordance with what is stated in numeral 4.2.6 of this Office, the Ministry, by exception, may grant the Market Maker or UDIBONOS Market Maker in question a period to reduce said Proportional Long Net Position so that it is again within the limit referred to in the first paragraph of this numeral. Said period may not be greater than the equivalent of three monthly measurement periods in terms of numeral 4.2.6, immediately following that in which the Market Maker or UDIBONOS Market Maker in question exceeded the Proportional Long Net Position limit, for the cause provided in this numeral.

For such effect, the Market Maker or UDIBONOS Market Maker in question must send to the Ministry, at the latest three Business Days before the end of the month in which they received the notification, before 13:00 hours, a written request to the UCP, in which: a) Detail the act that caused the Proportional Long Net Position to average 35% (thirty-five percent) or more in monthly periods in accordance with what is stated in numeral 4.2.6 of this Office. b) Report the actions they will adopt to reduce the Proportional Long Net Position to the limit indicated in the first paragraph of this numeral. c) Provide the necessary information to prove that once the Market Maker or UDIBONOS Market Maker in question implements the actions in terms of subsection b) above, they will be located again within the limit.

The Ministry, at least at the end of the month, will notify its determination to the Market Maker or UDIBONOS Market Maker in question, through the electronic, computing or telecommunications medium authorized for such purpose by said dependency. Likewise, the Ministry, with at least one Business Day prior to the end of the month, will make known to the Bank of Mexico, so that it abstains from suspending said Market Maker or UDIBONOS Market Maker their right to carry out securities lending operations with the Bank of Mexico on CETES, BONOS and UDIBONOS, during the period granted by the Ministry for said Market Maker or UDIBONOS Market Maker to reestablish their Proportional Long Net Position within the limit referred to in the first paragraph of this numeral.

Those Market Makers or UDIBONOS Market Makers who obtain the exception referred to in this numeral, at no time shall exceed the percentage of their Proportional Long Net Position that gave rise to the corresponding request. If at the expiration of the period granted by the Ministry in terms of the respective exception, the Market Maker or UDIBONOS Market Maker does not decrease their Proportional Long Net Position, the Bank of Mexico, at least three Business Days in advance of the expiration date of said period, will notify them, through the electronic, computing or telecommunications medium authorized for such purpose by said Bank, that starting from the Business Day following that on which the period granted by the Ministry expires, the right of the Market Maker or UDIBONOS Market Maker to carry out securities lending operations with the Bank of Mexico on CETES, BONOS and UDIBONOS will be suspended, in terms of what is provided in the first paragraph of this numeral. 4.2.8 …”

Annex 3 Procedure for the Allocation of Purchase Option for BONOS, CETES and UDIBONOS

If the aggregate demand of all Market Makers and UDIBONOS Market Makers (Market Maker) through the exercise of this purchase right for BONOS, CETES and UDIBONOS results in greater than 35% of the total amount assigned in each of the Auctions, the following procedure shall be followed.

Definitions: Amount requested by Market Maker i, i=1, 2, 3,…, n, for the exercise of the purchase option.

35% of the total amount assigned in the Auction. Percentage of the amount of computable bids defined in numeral 4.1.2 of this Office presented in the Auction by Market Maker i with respect to the sum of the computable bids presented by all Market Makers wishing to exercise the purchase right. Percentage of the amount requested by Market Maker i for the exercise of the purchase right with respect to the total amount requested by the set of Market Makers.

Let,

Based on the above, the following two possible cases may occur:

1. If X ≤ V, then each Market Maker i receives ,
2. If X > V, then, 1st step: Market Maker i receives Let ; If W = V – Z > 0, 2nd Step: Market Maker i receives Let: ; , 3rd step: those Market Makers i who received as allocation the requested amount are eliminated from the calculation, i.e., . For the remaining Market Makers, the available quantity will be prorated as follows:

With which the final allocation of Market Maker i will be .

“TRANSITORY SOLE.- What is provided in this Office shall enter into force on the Business Day following its publication in the Official Gazette of the Federation.”

Without further particular, I take this opportunity to send you a cordial greeting.

SINCERELY, THE HEAD OF THE UNIT MARÍA DEL CARMEN BONILLA RODRÍGUEZ Mtro. Gabriel Yorio González. – Undersecretary of Finance and Public Credit. -For your knowledge. - Present.

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