Circular 13/2021 — Modifications to Circular 14/2007 (External Reference Rates)

892 OFFICIAL GAZETTE Wednesday, December 29, 2021

CIRCULAR 13/2021, addressed to Credit Institutions and Regulated Multiple-Object Financial Societies, regarding Modifications to Circular 14/2007 (External Reference Rates).

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

CIRCULAR 13/2021

TO CREDIT INSTITUTIONS AND REGULATED MULTIPLE-OBJECT FINANCIAL SOCIETIES:

SUBJECT: MODIFICATIONS TO CIRCULAR 14/2007 (EXTERNAL REFERENCE RATES)

The Bank of Mexico, with the purpose of continuing to promote the sound development of the financial system, as well as to foster the proper functioning of payment systems and the protection of the public's interests, taking into consideration the recommendations put forward by the Financial Stability Board (FSB, in English) and by the International Organization of Securities Commissions (IOSCO, in English) regarding the use of new interest reference rates, has determined the convenience of adapting the regulations on interest rates, in congruence with the transition to new reference rates that comply with best practices and standards at the global level.

For the above, based on articles 28, paragraphs sixth and seventh, of the Political Constitution of the United Mexican States, 24 and 26 of the Bank of Mexico Law, 4 and 22 of the Law for Transparency and Ordering of Financial Services, 1, 4, first paragraph, 8, paragraphs fourth and eighth, 10, first paragraph, 12, first paragraph, in relation to 19 Bis 1, fraction XI, 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 Banking Operations and the Directorate of Central Banking Provisions, respectively, as well as Second, fractions VI, and X, of the Agreement on the Assignment of Administrative Units of the Bank of Mexico, it has resolved to modify the definition of “Financial Institutions” in numeral 1, as well as numerals 2.3, second paragraph, 2.4, first paragraph, 2.5, first paragraph, and 2.7 of the “Provisions of general nature referred to in article 4 of the Law for Transparency and Ordering of Financial Services in matters of interest rates”, contained in Circular 14/2007, to read as follows:

PROVISIONS OF GENERAL NATURE REFERRED TO IN ARTICLE 4 OF THE LAW FOR TRANSPARENCY AND ORDERING OF FINANCIAL SERVICES IN MATTERS OF INTEREST RATES

“1. Definitions ... Financial Institutions: the: (i) credit institutions and (ii) regulated multiple-object financial societies, and ...”

“2.3 ... ... In the event that Financial Institutions agree on an interest rate based on a reference rate, they must also agree on the date for setting the rate and the method for determining the consultation day of the rate. In the case of arithmetic or geometric averages or other calculation methodologies, the rate setting date, the consultation period, and the period with respect to which the arithmetic average will be determined must be agreed upon. The foregoing, understanding that the period for determining the interest rate does not necessarily have to coincide with the period in which interest accrues.”

“2.4 ... When a reference rate is agreed upon, one or more alternative reference rates must be agreed upon in the event that the originally agreed reference rate ceases to exist, is disclosed, that subject to the determination of the Bank of Mexico, it ceases to be considered as an adequate reference to market conditions, or that the competent authorities or the associations recognized by the financial markets of the relevant jurisdictions cease to consider it as an adequate reference to market conditions in their respective jurisdictions, and the order in which, if necessary, such alternative reference rates would substitute the originally agreed rate must be established. Alternative rates may be considered as a reference if they are formally recommended for use by the Bank of Mexico, the competent authority, or by the association recognized by the financial markets to recommend rates denominated in the currency in question.

Wednesday, December 29, 2021 OFFICIAL GAZETTE 893 ...”

“2.5 ... In Credits denominated in national currency, only the following may be used as a reference rate: a) the interbank equilibrium interest rates (TIIE) for funding and terms greater than one banking business day, provided for in Chapter IV of Title Third of Circular 3/2012 of the Bank of Mexico; b) the primary placement yield rate of Certificates of the Treasury of the Federation (CETES); c) the term funding cost of liabilities denominated in national currency that the Bank of Mexico deems representative of the set of multiple banking institutions and that it publishes in the Official Gazette of the Federation (CCP); d) the Nafin Rate (TNF) which is published in the Official Gazette of the Federation; e) the rate that had been agreed upon in the instruments documenting Credits of development banking or public economic promotion trusts, only in Credits that are subject to discount with such development banking institutions or trusts, or that are granted with resources coming from said institutions or trusts; f) the weighted banking funding rate, or g) the weighted government funding rate. These last two rates will be those made known by the Bank of Mexico on its electronic page on the worldwide Internet network with the domain name www.banxico.org.mx. ...”

“2.7 ... In Credits denominated in foreign currency, only the following may be used as a reference: a) Interest rates with a term of one day based on transactions observed in the market that comply with the principles established by the International Organization of Securities Commissions (IOSCO, in English), and that are accepted by the authorities of the international jurisdiction to which they belong, among which are, in an illustrative but not exhaustive manner, the SOFR (Secured Overnight Financing Rate) of the U.S.A., the SONIA (Sterling Overnight Interbank Average Rate) of the United Kingdom, and the ESTR (Euro Short Term Rate) of the European Union. Likewise, interest rates with terms greater than one day, which represent arithmetic or geometric averages constructed with composite methodologies or established using other methodologies, will also be considered as reference rates, provided they are derived from the previously mentioned rates in this subsection and are proposed for use, through mass media, including their respective electronic pages on the Internet, by any competent authority or association recognized by the financial markets to recommend rates denominated in the currency in question; b) Interest rates that have a market reference, that are not unilaterally determined by a financial entity, being able to be determined by a financial authority of the country in question or by a group of financial entities, among which is the LIBOR (London Interbank Offered Rate), of which their term and the publication where they will be obtained must be clearly indicated, such publication being of public knowledge. In the event that any reference rate mentioned in this subsection ceases to be disclosed, that subject to the determination of the Bank of Mexico, it ceases to be considered as an adequate reference to market conditions, or that the competent authorities or the associations recognized by the financial markets of the relevant jurisdictions cease to consider it as an adequate reference to market conditions in their respective jurisdictions, the supplementary rate applicable in those contracts formalized prior to the cessation of use of the original reference rate and that do not provide for the application of alternative rates in accordance with numeral 2.4 of these provisions, may be considered as a reference if it is formally proposed for use by any competent authority or association recognized by the financial markets to recommend rates denominated in the currency in question; c) The rate that had been agreed upon in the instruments documenting credits received from foreign or international financial organisms, from development banking institutions or from public economic promotion trusts, only in Credits that are subject to discount with such development banking institutions or trusts, or that are granted with resources coming from said organisms, institutions or trusts, or d) In the case of Credits in U.S. dollars, the term funding cost of liabilities denominated in U.S. dollars (CCP-Dollars), which the Bank of Mexico calculates and publishes in the Official Gazette of the Federation.”

TRANSITIONAL PROVISION SINGLE. This Circular shall enter into force the day following its publication in the Official Gazette of the Federation.

Mexico City, December 23, 2021.- BANK OF MEXICO: General Director of Central Banking Operations, Gerardo Israel García López.- Signature.- Director of Central Banking Provisions, María Teresa Muñoz Arámburu.- Signature.

894 OFFICIAL GAZETTE Wednesday, December 29, 2021

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.