Circular 13/2024 — Modifications to Repo Rules

Thursday, November 14, 2024 OFFICIAL GAZETTE 155 BANCO DE MEXICO CIRCULAR 13/2024 addressed to credit institutions, brokerage houses, investment funds, specialized investment societies for retirement funds, general warehouse receipts, insurance institutions, surety institutions, regulated multiple-object financial societies that maintain equity links with a credit institution, and the National Financial Development Institution for Agriculture, Rural, Forestry and Fisheries, regarding the Modifications to the Rules to which credit institutions, brokerage houses, investment funds, specialized investment societies for retirement funds, general warehouse receipts, insurance institutions, surety institutions, regulated multiple-object financial societies that maintain equity links with a credit institution, and the National Financial Development Institution for Agriculture, Rural, Forestry and Fisheries, shall be subject in their repo operations.

At the margin, a logo stating: Bank of Mexico.- "2024, Year of Felipe Carrillo Puerto, Meritorious of the Proletariat, Revolutionary and Defender of the Mayab".

CIRCULAR 13/2024 TO CREDIT INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT FUNDS, SPECIALIZED INVESTMENT SOCIETIES FOR RETIREMENT FUNDS, GENERAL WAREHOUSE RECEIPTS, INSURANCE INSTITUTIONS, SURETY INSTITUTIONS, REGULATED MULTIPLE-OBJECT FINANCIAL SOCIETIES THAT MAINTAIN EQUITY LINKS WITH A CREDIT INSTITUTION AND THE NATIONAL FINANCIAL DEVELOPMENT INSTITUTION FOR AGRICULTURE, RURAL, FORESTRY AND FISHERIES: SUBJECT: MODIFICATIONS TO THE RULES TO WHICH CREDIT INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT FUNDS, SPECIALIZED INVESTMENT SOCIETIES FOR RETIREMENT FUNDS, GENERAL WAREHOUSE RECEIPTS, INSURANCE INSTITUTIONS, SURETY INSTITUTIONS, REGULATED MULTIPLE-OBJECT FINANCIAL SOCIETIES THAT MAINTAIN EQUITY LINKS WITH A CREDIT INSTITUTION AND THE NATIONAL FINANCIAL DEVELOPMENT INSTITUTION FOR AGRICULTURE, RURAL, FORESTRY AND FISHERIES, IN THEIR REPO OPERATIONS.

The Bank of Mexico, with the purpose of continuing to promote the sound development of the financial system, foster the proper functioning of payment systems and the protection of the interests of the public, and in compliance with the "Decree by which various provisions of the Securities Market Law and the Investment Funds Law are reformed, added to and repealed", published in the Official Gazette of the Federation on December 28, 2023, has considered it necessary to establish rules applicable to hedge funds in their repo operations.

For the above reason, based on articles 28, paragraphs seventh and eighth, of the Political Constitution of the United Mexican States, 24 and 26 of the Bank of Mexico Law, 46 Bis 5, fraction IV, 54, fractions I and III, and 81, second paragraph, of the Credit Institutions Law, 176, first paragraph, of the Securities Market Law, 15, second paragraph, of the Investment Funds Law, 48, fraction VI, of the Savings for Retirement Systems Law, 11 Bis 2, fraction XI, and 87-D, fourth paragraph, of the General Law of Organizations and Auxiliary Credit Activities, 132 and 157 of the Insurance and Surety Institutions Law, 22 of the Law for Transparency and Ordering of Financial Services, 1, 4, first paragraph, 8, fourth and eighth paragraphs, 10, first paragraph, 12 Bis, first paragraph, in relation to 20 Quater, fraction IV, 14, first paragraph, in relation to 25 Bis, fraction VII, 14 Bis 1, first paragraph, in relation to 25 Bis 1, fraction IV, 17, fraction I, and 19 Bis, fraction V, 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 General Directorate of Financial System Affairs, the Central Banking Provisions Directorate and the National Markets Development Management, respectively, as well as Second, fractions I, IV, VI, X and XVII, of the Agreement on the Assignment of Administrative Units of the Bank of Mexico, has resolved to modify the definitions of "Securities Depository", "Foreign Financial Entities", "Investment Funds" and "Reference Countries" contained in numeral 1, as well as numerals 3.3, 8.1, third paragraph, and 8.2, first paragraph; add the definitions of "Prime Broker", "Central Securities Counterparty", "Foreign Hedge Funds" and "Covered Investment Funds" to numeral 1, as well as paragraphs fourth, fifth and sixth to numeral 2.2, and paragraphs first and second to numeral 5.1, shifting the current paragraphs first and second to become third and fourth, respectively, of said numeral 5.1, as well as repeal paragraph second of numeral 10, of the "Rules to which credit institutions, brokerage houses, investment funds, specialized investment societies for retirement funds, general warehouse receipts, insurance institutions, surety institutions, regulated multiple-object financial societies that maintain equity links with a credit institution and the National Financial Development Institution for Agriculture, Rural, Forestry and Fisheries, shall be subject in their repo operations", issued by the Bank of Mexico on January 12, 2007, as modified by subsequent resolutions, to remain in the following terms:

RULES TO WHICH CREDIT INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT FUNDS, SPECIALIZED INVESTMENT SOCIETIES FOR RETIREMENT FUNDS, GENERAL WAREHOUSE RECEIPTS, INSURANCE INSTITUTIONS, SURETY INSTITUTIONS, REGULATED MULTIPLE-OBJECT FINANCIAL SOCIETIES THAT MAINTAIN EQUITY LINKS WITH A CREDIT INSTITUTION AND THE NATIONAL FINANCIAL DEVELOPMENT INSTITUTION FOR AGRICULTURE, RURAL, FORESTRY AND FISHERY, SHALL BE SUBJECT IN THEIR REPO OPERATIONS

"1. DEFINITIONS ... Prime Broker: Foreign Financial Entities constituted in countries of the European Union; in those that are members of the Organisation for Economic Co-operation and Development (OECD), or those whose financial authorities are members of the Council of the international grouping of authorities responsible for securities regulation, known as the International Organization of Securities Commissions (IOSCO), which provide comprehensive services to Covered Investment Funds for the execution of Repo operations, among others, the provision of liquidity through financing operations; treasury, including cash flow management, as well as those related to the custody and administration of Securities and guarantees. ... Central Securities Counterparty: Entities granted or authorized to act as such, which are established in Mexico or in any of the Reference Countries. Securities Depository: Entities granted or authorized to act as such, which are established in Mexico or in any of the Reference Countries.

Thursday, November 14, 2024 OFFICIAL GAZETTE 157 ... Foreign Financial Entities: Those authorized to act as financial entities by the competent authorities of the countries in which they are constituted, including Foreign Hedge Funds and Prime Brokers. ... Foreign Hedge Funds: Entities, including vehicles organized as trusts or similar figures, constituted in any of the foreign jurisdictions indicated below, whose main object is to carry out investments with resources contributed by the persons participating in said entities for that purpose, as well as with resources from financing acquired for that purpose, in order to distribute among those persons the profits or, as applicable, losses derived from said investments, and which are authorized or empowered to carry out said activities in the jurisdictions in which they operate. The referred entities shall be those constituted in countries of the European Union, in those that are members of the Organisation for Economic Co-operation and Development (OECD) or those whose financial authorities are members of the Council of the international grouping of authorities responsible for securities regulation, known as the International Organization of Securities Commissions (IOSCO). Investment Funds: Legal persons authorized to organize and function as such in terms of the Investment Funds Law, including Covered Investment Funds. Covered Investment Funds: Legal persons authorized to organize and function as Investment Funds and which, according to their investment regime, adopt the type provided for in article 6, fraction IV, of the Investment Funds Law. ... Reference Countries: Those corresponding to authorities that are ordinary members of the Council of the International Organization of Securities Commissions, as well as those that are part of the European Union. ..."

"2.2 ... Furthermore, Covered Investment Funds may also enter into Repos, in their capacity as reported parties, only with the counterparties indicated in the first paragraph of this numeral, without the limits mentioned in paragraphs second and third of this numeral being applicable to them. In addition to the above, Covered Investment Funds will not be subject to the obligations to observe adjustment factors and constitute collateral, established in numeral 8.1, without prejudice to the restrictions applicable to their counterparties in terms of these Rules. The Bank of Mexico may establish, through general provisions, limits on the amounts of Repos entered into by Covered Investment Funds, based on the characteristics of the assets subject to investment and of the fund itself, as well as the market situation."

"3.3 Investment Funds and Siefores may enter into Repos with the Securities permitted by their law, as well as the provisions emanating from it and provided for in their investment regime, without prejudice to the restrictions applicable to counterparties regarding the Securities with which they may enter into Repos."

"5.1 Entities may contract the settlement of Repo operations through a Securities Depository, a Central Securities Counterparty or one of the entities referred to in numeral 2.8, first paragraph, of these Rules. For the purposes of the provision in the preceding paragraph, Entities must send the necessary information regarding the Repos entered into, on the same day of their celebration, either to the Securities Depository, the Central Securities Counterparty or the entities referred to in numeral 2.8, that have been contracted to settle their operations.

158 OFFICIAL GAZETTE Thursday, November 14, 2024 ..."

"8.1 ... Repos entered into by Entities with the counterparties referred to in the first paragraph of this numeral, as well as General Warehouse Receipts with the counterparties referred to in numeral 8.1 Bis, for terms greater than three Banking Business Days counted from the date of celebration, including their extensions, must establish the obligation to constitute collateral covering the exposure of one party of the Repo with respect to the other, when such exposure exceeds the maximum amount agreed by the parties themselves according to the corresponding master contract. The exposure will be calculated as the difference between the agreed price of the Repo at the time of its celebration, plus the agreed premium accrued to the calculation date, and the market value of the Securities or Deposit Certificates subject to the Repo, the latter incorporating the adjustment factor determined in accordance with the procedure and guidelines described in this numeral. ..."

"8.2 In the case of Repos between Entities or General Warehouse Receipts, with Foreign Financial Entities or Institutional Investors, these must be confirmed on the same day of their negotiation through any means that leaves documentary evidence, even in electronic media, of the celebration of the corresponding operation. When Repos between Entities are settled through Securities Depositories, the records of the operation will serve as documentary evidence of the confirmation. In the event that the operation is settled through a Central Securities Counterparty, the confirmation issued by the Central Securities Counterparty as a result of the novation of the operation will be considered as confirmation. When the operation is confirmed through the entities referred to in numeral 2.8, first paragraph, the confirmation will be that generated by said entities as documentary evidence for such purposes. ..."

"10. INFORMATION ... Repealed."

TRANSITIONAL PROVISIONS FIRST.- The provisions of this Circular will enter into force on December 16, 2024. SECOND.- For the purposes of numeral 2.2, last paragraph, of these Rules, the Bank of Mexico may evaluate, at least once a year, the characteristics of the assets subject to investment and of the fund itself, as well as the market situation, so that, if it considers it convenient, through general provisions, it establishes limits on the amounts of Repos entered into by Covered Investment Funds.

Mexico City, November 11, 2024.- BANK OF MEXICO: General Director of Payment Systems and Market Infrastructures, Othón Martino Moreno González.- Signature.- General Director of Financial Stability, Fabrizio López Gallo Dey.- Signature.- General Director of Financial System Affairs, José Luis Negrín Muñoz.- Signature.- Director of Central Banking Provisions, María Teresa Muñoz Arámburu.- Signature.- Manager of National Markets Development, Lautaro José Silva Ibarguren.- Signature.

Thursday, November 14, 2024 OFFICIAL GAZETTE 159 For any queries regarding the content of this Circular, the Bank of Mexico is at your disposal through the Central Banking Authorizations and Sanctions Directorate at telephone (55) 5237-2000 extension 3200.