Circular 15/2024 — Modifications to Circular 4/2012 (Hedge Investment Funds)

85 OFFICIAL GAZETTE Tuesday, December 17, 2024 BANCO DE MEXICO CIRCULAR 15/2024 addressed to credit institutions, brokerage houses, investment funds, multiple-object financial societies that have equity links with a multiple-banking institution, general warehouse receipts institutions, insurance institutions, and the National Financial Institution for Agricultural, Rural, Forestry and Fisheries Development, regarding the Modifications to Circular 4/2012 (Hedge Investment Funds).

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

CIRCULAR 15/2024 TO CREDIT INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT FUNDS, MULTIPLE-OBJECT FINANCIAL SOCIETIES THAT HAVE EQUITY LINKS WITH A MULTIPLE-BANKING INSTITUTION, GENERAL WAREHOUSE RECEIPTS INSTITUTIONS, INSURANCE INSTITUTIONS AND THE NATIONAL FINANCIAL INSTITUTION FOR AGRICULTURAL, RURAL, FORESTRY AND FISHERIES DEVELOPMENT:

SUBJECT: MODIFICATIONS TO CIRCULAR 4/2012 (HEDGE INVESTMENT FUNDS)

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 public's interests, 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by which various provisions of the Securities Market Law and the Investment Funds Law are reformed, added to and repealed", published in the Official Gazette of the Federation on December 28, 2023, has deemed it necessary to establish rules applicable to hedge investment funds in their derivative operations.

For the above reason, based on articles 28, paragraphs seventh and eighth, of the Political Constitution of the United Mexican States, 2, 3, fraction I, 24, 26 and 36 of the Bank of Mexico Law, 46, fraction XXV, and 48 of the Credit Institutions Law, 176, first paragraph, of the Securities Market Law, 15, second paragraph, of the Investment Funds Law, 11 Bis 2, fraction XII, and 87-D, fourth paragraph, of the General Law of Auxiliary Credit Organizations and Activities, 133 of the Insurance and Surety Institutions Law, 9, second paragraph, of the National Financiera Organic Law, 6, second paragraph, of the Federal Mortgage Society Organic Law, 9, second paragraph, of the Bienestar Bank Organic Law, 9, second paragraph, of the National Foreign Trade Bank Organic Law, 10, second paragraph, of the National Public Works and Services Bank Organic Law, 8, second paragraph, of the National Army, Air Force and Navy Bank Organic Law, 22 of the Law for Transparency and Ordering of Financial Services, 4, first paragraph, 8, fourth and eighth paragraphs, 10, first paragraph, 12, first paragraph, in relation to 19 Bis, fraction V, 12 Bis, first paragraph, in relation to 20 Quáter, fraction IV, 14 Bis 1, first paragraph, in relation to 25 Bis 1, fraction IV, 17, fraction I, and 25 Bis, fraction VII, 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, the General Directorate of Payment Systems and Market Infrastructures, the General Directorate of Financial System Affairs, the Directorate of Central Bank Provisions and the Directorate of Financial System Information, respectively, as well as Second, fractions I, IV, VI, X and XVII, of the Agreement on the Affiliation of the Administrative Units of the Bank of Mexico, has resolved to modify the definitions of "Foreign Financial Entities", "Hedge Funds", "Investment Funds", as well as paragraphs 3.1.1, 3.1.2, 3.1.3, 3.1.4, 3.1.5, 3.1.6, 3.1.7, 3.2, 3.4, 4., 5.1, 5.2, 6.2.4, second and fourth paragraphs, 6.2.9.1, last paragraph, 7.5, first paragraph, and 11., as well as add the definitions of "Prime Broker", "Hedge Investment Funds", and Annex 7, of the "Rules for the Execution of Derivative Transactions", issued by the Bank of Mexico through Circular 4/2012, to remain in the following terms:

RULES FOR THE EXECUTION OF DERIVATIVE TRANSACTIONS

1. GENERAL PROVISIONS

"1.1 For the purposes of these Rules, the following shall be understood, in singular or plural, as:

...

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 group of authorities responsible for securities regulation, known as the International Organization of Securities Commissions (IOSCO, in English), which provide integral services to Hedge Investment Funds for the execution of Derivative Transactions; 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.

...

Foreign Financial Entities: entities constituted in foreign jurisdictions, that are authorized by the competent authorities to carry out, on a habitual basis, the financial operations they offer in said jurisdictions, 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 gains or, in their case, losses derived from said investments, and that 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 group of authorities responsible for securities regulation, known as the International Organization of Securities Commissions (IOSCO, in English).

Investment Funds: legal persons authorized to organize and function as such in terms of the Investment Funds Law, including Hedge Investment Funds.

Hedge Investment Funds: legal persons authorized to organize and function as Investment Funds and that, according to their investment regime, adopt the type provided for in article 6, fraction IV, of the Investment Funds Law.

..."

3. AUTHORIZATIONS

3.1 ENTITIES

"3.1.1 Entities and Hedge Investment Funds must obtain authorization from the Bank of Mexico to enter into Derivative Transactions on their own account.

For this purpose, Entities and Hedge Investment Funds must submit to the Management an authorization request specifying the following:

a) to c) ...

In addition, they must accompany the request with a communication issued by the audit committee, or by the regulatory controller of the investment fund operating society contracted by the Hedge Investment Fund in question, in which they declare that they comply with the requirements set forth in Annexes 1 or 7, as applicable, of these Rules, regarding Derivative Transactions and the Underlyings for which they request authorization to operate on their own account."

"3.1.2 Entities and Hedge Investment Funds that obtain authorization to enter into Derivative Transactions on their own account may enter into other types of Derivative Transactions, operate in other Markets or enter into Derivative Transactions on Underlyings provided for in letters a) to f) and h) of paragraph 2.1, different from those indicated in said authorization, provided that:

a) ...

i) ...

ii) ...

iii) The Underlyings referred to in letters a) to f) and h) of the aforementioned paragraph 2.1 on which they intend to enter into Derivative Transactions on their own account. In the event that Entities or Hedge Investment Funds intend to enter into Derivative Transactions on any of the Underlyings indicated in letter h) of paragraph 2.1, they must include in the notice referred to in this paragraph 3.1.2 a detailed description of each of the Derivative Transactions in question.

b) ...

Entities and Hedge Investment Funds that have authorization from the Bank of Mexico to carry out one or more of the Derivative Transactions may carry out, without the need to obtain a new authorization or comply with letters a) and b) above, the same type of such Derivative Transactions on the fiduciary trust certificates indexed as referred to in article 63 Bis 1, fraction III, of the Securities Market Law, registered in the National Securities Registry, as well as values issued abroad with similar characteristics to these, listed in the International Quotation System, provided that said certificates and foreign values meet the following characteristics: a) seek to replicate the behavior of the same Underlyings corresponding to the Derivative Transactions subject to said authorization, b) do not involve taking short positions in any of the assets subject to investment to which they refer, except for those resulting from the loan of securities, c) do not seek to replicate mathematically or statistically, in an inverse or exponential manner, the behavior of indices, financial assets or reference parameters, or that the indices, financial assets or reference parameters whose behavior they seek to replicate do not, in turn, replicate mathematically or statistically, in an inverse or exponential manner, the behavior of other indices, financial assets or reference parameters.

The provisions of this paragraph shall not apply in relation to Credit Derivative Transactions that Entities and Hedge Investment Funds intend to enter into as additional to those on which they have authorization from the Bank of Mexico. Entities and Hedge Investment Funds that find themselves in the aforementioned situation, in order to carry out the execution of Credit Derivative Transactions or other Derivative Transactions on the Underlyings indicated in letter g) of paragraph 2.1, must obtain the authorization of the Bank of Mexico in terms of paragraph 3.1.1."

"3.1.3 ...

...

Hedge Investment Funds that have authorization from the Bank of Mexico for the execution of Derivative Transactions on their own account must send to the Management, during the month of August of each year, a communication issued by the regulatory controller of the investment fund operating society contracted by the Hedge Investment Fund in question, in which it states that said Hedge Investment Fund complies with the requirements indicated in Annex 7 of these Rules, regarding those Derivative Transactions they carry out and the Underlyings subject to said operations. The referred communication must be accompanied by the audit report or opinion that was presented to the regulatory controller, with which it is concluded that compliance with what is established in Annex 7 of these Rules is given and in which it must clearly indicate the areas and procedures audited, as well as the different procedures that were carried out for the verification of compliance with said requirements.

Exceptionally, when it deems it convenient, the Bank of Mexico may request that Entities and Hedge Investment Funds present said communications on dates different from those indicated in the preceding paragraphs."

"3.1.4 Entities and Hedge Investment Funds may carry out Forward Transactions on their own account, without requiring authorization when the Underlyings in question are Development Bonds of the Federal Government of the United Mexican States, with fixed interest rate, in national currency and the Settlement is carried out within a period not greater than eight Business Days counted from its date of agreement."

"3.1.5 Entities and Hedge Investment Funds may carry out Derivative Transactions on their own account, without the need to comply with the requirements provided for in paragraphs 3.1.1, 3.1.2 and 3.1.3, when said operations have as their exclusive purpose the hedging of risks inherent to the Entity or the Hedge Investment Fund.

For the purposes of the above, Entities and Hedge Investment Funds must: i) have a risk management and control unit, or a risk management officer for the case of Hedge Investment Funds, in charge of valuing, measuring and following up on such risks, ii) have an adequate valuation of said Derivative Transactions and counterparty risk and determine the effectiveness of the hedge based on the criteria or requirements referred to in NIF C-10 "Derivative Financial Instruments and Hedge Relationships" or the one that replaces or modifies it, according to the accounting criteria applicable to each Entity and Hedge Investment Fund, as well as submit these Derivative Transactions to the respective risk committees of said Entities, or to the responsible persons for carrying out integral risk management for the case of Hedge Investment Funds, for their prior approval before their execution, and iii) inform semi-annually to their board of directors, their board of trustees, or the body in charge of carrying out the administration functions for the case of Hedge Investment Funds, as applicable, regarding the execution of those Derivative Transactions and their limits, including the calculation on the effectiveness of the hedge."

"3.1.6 The Bank of Mexico may grant the authorization referred to in paragraph 3.1.1 of these Rules, without the need for the Entities and Hedge Investment Funds in question to include in the respective request the communication referred to in the last paragraph of said paragraph 3.1.1, provided that the Derivative Transactions carried out by said Entities and Hedge Investment Funds on their own account are matched with others of the same type, but of a contrary nature, for the same amount and term, as well as on the same Underlyings.

For this purpose, Entities and Hedge Investment Funds must submit the request referred to in the second paragraph of paragraph 3.1.1, with at least 15 calendar days in advance of the date on which they intend to start agreeing on such Derivative Transactions.

Likewise, said Entities and Hedge Investment Funds must send the communication referred to in the last paragraph of paragraph 3.1.1 within the year following the date on which they have presented to the Bank of Mexico the request mentioned in the preceding paragraph. In the event that Entities or Hedge Investment Funds do not comply with this requirement, the authorization granted by the Bank of Mexico will lose its effects from the day following that on which the year referred to in this paragraph concludes, so that the Entities or Hedge Investment Funds in question must abstain from agreeing and carrying out new Derivative Transactions of those they had requested authorization for in accordance with the preceding paragraph and may not request a new authorization for such Derivative Transactions subsequently, in terms of this paragraph."

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"3.1.7 Entities and Sofomes that intend to acquire or issue on their own account, as well as Hedge Investment Funds that intend to acquire, titles that document Structured Operations must obtain the authorization referred to in paragraph 3.1.1 of these Rules to carry out the Derivative Transactions and on the Underlyings to which these refer."

"3.2 INVESTMENT FUNDS

...

...

Investment Funds, with the exception of Hedge Investment Funds, may only enter into Credit Derivative Transactions to cover risks referred to Underlyings that consist of assets of their investment object in accordance with the Investment Funds Law and that said funds maintain in their assets during the validity of the respective Credit Derivative Transactions."

"3.4 OTHER DERIVATIVE TRANSACTIONS, ON OTHER UNDERLYINGS OR WITH A DIFFERENT SETTLEMENT DATE

The Bank of Mexico may authorize Entities, Investment Funds, General Warehouse Receipts Institutions, Sofomes and Insurance Institutions to carry out Derivative Transactions: a) different from those indicated in letter (i) of the definition of Derivative Transactions, b) on Underlyings different from those indicated in paragraph 2.1, or c) with a Settlement Date different from that established in paragraph 7.4 of these Rules. For this purpose, interested parties must submit to the Management a written authorization request where they describe, as appropriate, the Derivative Transaction they intend to carry out, its structure or combination of Derivative Transactions, the respective Underlying, or the Settlement Date to be established. In the case of Entities or Hedge Investment Funds, they must accompany a communication issued by their respective audit committee, or by the regulatory controller of the investment fund operating society contracted by the Hedge Investment Fund in question, in terms of the last paragraph of paragraph 3.1.1, as well as the audit report or opinion that has been presented to the audit committee or equivalent body, in which it is stated that the subject in question complies with what is established in Annexes 1 or 7, as applicable, of these Rules and in which it must clearly indicate the areas and procedures audited, as well as the different procedures that have been carried out for the verification of compliance with said requirements."

"4. AUTHORIZED COUNTERPARTIES

...

...

a) Other Entities, Investment Funds, Sofomes, General Warehouse Receipts Institutions, as well as Insurance Institutions, investment fund operating societies, specialized investment societies for retirement funds, regulated and unregulated multiple-object financial societies, credit unions, development agencies and Foreign Financial Entities, and

b) ...

Entities may only carry out Derivative Transactions in over-the-counter markets for the hedging of their own risks, in terms of paragraph 3.1.5 of these Rules, with Entities and Hedge Investment Funds authorized by the Bank of Mexico to enter into Derivative Transactions on their own account and with Foreign Financial Entities. Likewise, in the case of Derivative Transactions in Recognized Markets, the counterparty of the Derivative Transaction must be the clearing house or central counterparty of the Recognized Market in which the Derivative Transaction in question has been executed.

Credit Institutions and the FND may carry out Credit Derivative Transactions only in those cases where their respective counterparties are other Credit Institutions and Hedge Investment Funds that, in both cases, have the authorization of the Bank of Mexico, in accordance with these Rules, to enter into said Derivative Transactions on their own account, or with Foreign Financial Entities. Likewise, Credit Institutions may enter into Credit Default Swaps and Total Return Swaps, as sellers, only in those cases where their respective counterparties are any of the following:

a) to e) ...

Additionally, in the Credit Default Swaps and Total Return Swaps that Credit Institutions enter into with the financial entities mentioned in letters a) to d)

Tuesday, December 17, 2024 OFFICIAL GAZETTE 89

previous counterparts, with the exception of Hedge Funds, may only enter into Credit Derivatives in those cases where they intervene as buyers and with respect to Underlyings that consist of assets that, in accordance with the provisions applicable to them, they maintain in their assets during the term of the respective Credit Derivatives Transactions. The Total Return Derivatives Transactions entered into in accordance with the above must be fully funded, that is, the buyer must deliver to the seller the payment of the agreed amount upon the celebration of the transaction in exchange for receiving the flows of the Underlying and any increase in its value.

Hedge Funds may enter into Credit Default Derivatives and Total Return Derivatives, as sellers, only in those cases where their respective counterparties are Credit Institutions, Brokerage Houses, and Foreign Financial Entities. In the celebration of these transactions, Brokerage Houses may only intervene as buyers and with respect to Underlyings that consist of assets that, in accordance with the provisions applicable to them, they maintain in their assets during the term of the respective Credit Derivatives Transactions. Likewise, the Total Return Derivatives Transactions entered into by Brokerage Houses as buyers must be fully funded, that is, the buyer must deliver to the seller the payment of the agreed amount upon the celebration of the transaction in exchange for receiving the flows of the Underlying and any increase in its value.

Investment Funds, General Warehouse Receipt Institutions, Sofomes, and Insurance Institutions may enter into Derivatives Transactions in over-the-counter markets only in those cases where their counterparties are Entities authorized by the Bank of Mexico to enter into Derivatives Transactions on their own behalf or Foreign Financial Entities. Likewise, with respect to Derivatives Transactions in Recognized Markets, the counterparty to the Derivatives Transaction must be the clearing house or central counterparty of the Recognized Market in which the Derivatives Transaction in question was entered into.”

5. INSTRUMENTATION AND NEGOTIATION

“5.1 The Derivatives Transactions, except for Credit-Linked Notes, that: (i) Entities enter into among themselves, as well as with other national financial entities or Foreign Financial Entities and with Institutional Investors and Qualified Investors, and (ii) Investment Funds, General Warehouse Receipt Institutions, Sofomes, and Insurance Institutions enter into with their authorized counterparties, shall be documented in master contracts, which must reflect guidelines and directives contained in contract models recognized in international markets, such as those approved by Recognized Markets or by the United States of America company named “International Swaps and Derivatives Association, Inc.”, provided that this does not contravene applicable national provisions.

…”

“5.2 Standardized Derivatives Transactions between: a) Entities, b) an Entity and a Foreign Financial Entity that in its respective jurisdiction provides services of the same type as any of the Entities, c) an Entity and a national or foreign Institutional Investor, d) an Entity and a Hedge Fund, e) an Entity and a Foreign Hedge Fund, or f) a Hedge Fund and a Foreign Financial Entity that in its respective jurisdiction provides services of the same type as any of the Entities or Hedge Funds, shall be entered into: (i) in Recognized Markets, (ii) through societies that administer systems for facilitating securities transactions authorized by the CNBV, or (iii) through foreign institutions that perform functions similar to those carried out by the societies mentioned in the previous subsection (ii) that are recognized by the CNBV.

…”

6. GUARANTEES

…

6.2 MARGINS

…

“6.2.4 ...

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Entities and Investment Funds, to carry out the contracting of the subjects referred to in subsections iii) and iv) of the previous paragraph that provide them with administration or custody services for the assets they receive as collateral in connection with the exchange of Initial Margins in the celebration of Non-Centrally Cleared Over-the-Counter Derivatives Transactions, must have the approval of their respective risk committees, or, in the case of Investment Funds, the risk administration manager, based on an independent legal review conducted by an independent expert with knowledge of the regulation applicable in the jurisdiction where the foreign financial market infrastructure or the Foreign Financial Entity in question is located, in which it must be stated that the administration and custody of collateral for Initial Margin purposes complies with the requirements established in section 6.2.9.2 of these Rules.

...

A legal review shall be considered independent and, therefore, in accordance with the provisions of the first paragraph of this section, that which the Mexican Bankers Association, A.C., or the Mexican Securities Institutions Association, A.C., have requested to be prepared for such purpose. To this effect, the legal review in question must comply with the requirements established in the second and third paragraphs of this section and be submitted to the consideration of the respective risk committee, or, in the case of Investment Funds, the risk administration manager, of the corresponding Entity or Investment Fund.

…”

6.2.9 ADMISSIBLE COLLATERAL AND MINIMUM VALUATIONS FOR NON-CENTRALLY CLEARED OVER-THE-COUNTER DERIVATIVES TRANSACTIONS

“6.2.9.1. …

…

In all cases, Entities and Investment Funds must ensure that collateral for Initial Margin purposes, other than cash and government securities established in Annex 5, is diversified in accordance with the policies established by the risk committee, or, in the case of Investment Funds, the risk administration manager.”

7. FORMS OF SETTLEMENT

…

“7.5 Standardized Derivatives Transactions between: a) Entities, b) an Entity and a Foreign Financial Entity that in its respective jurisdiction provides services of the same type as any of the Entities, c) an Entity and a national or foreign Institutional Investor, d) an Entity and a Hedge Fund, e) an Entity and a Foreign Hedge Fund, or f) a Hedge Fund and a Foreign Financial Entity that in its respective jurisdiction provides services of the same type as any of the Entities or Hedge Funds, shall be settled through: i) clearing houses constituted in terms of the “Rules to which participants in the derivatives contracts market must adhere”, issued jointly by the Bank of Mexico, the SHCP, and the CNBV, or ii) foreign institutions that act as central counterparties in derivatives exchanges and/or foreign over-the-counter markets, and that have been recognized by the Bank of Mexico as such, in accordance with section 7.6 and subject to the internal regulations that the aforementioned clearing houses or foreign institutions acting as central counterparties in over-the-counter markets establish for the acceptance, clearing, and settlement of Standardized Derivatives Transactions.

…”

“11. LIMITATION, SUSPENSION, OR REVOCATION OF TRANSACTIONS

The Bank of Mexico may limit, suspend, or revoke the authorizations granted to Entities or Hedge Funds under these Rules to conduct Derivatives Transactions when:

a) …

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b) They cease to meet any of the requirements of Annexes 1 or 7, as applicable, of these Rules;

c) to e) …

f) The Entities or Hedge Funds themselves so request.”

“ANNEX 7

REQUIREMENTS FOR HEDGE FUNDS SEEKING TO CONDUCT DERIVATIVES TRANSACTIONS

I. ADMINISTRATION AND MONITORING REQUIREMENTS

1.- The board of directors of the investment fund management company hired by the Hedge Fund must define and monitor:

a) The general operation and control policies and procedures associated with Derivatives Transactions, including operation with their respective counterparties and other intermediaries in the market;

b) Exposure limits to different types of risk, including market, credit, liquidity, and other risks considered acceptable with respect to the celebration of Derivatives Transactions. These exposure limits may be defined with respect to the portfolio to which the positions are associated, which may include operations with debt instruments, foreign exchange sales and purchases, or operations with equity instruments, in addition to Derivatives Transactions;

c) The semi-annual review programs, or whenever market conditions or additional situations, in the judgment of the Hedge Fund, warrant it, with respect to the points described in subsections a) and b) above, and

d) The general operation process for new products, from registration in the trading system to accounting impact, in which at least the market, credit, and liquidity risks associated with the new Derivatives Transaction in question must be identified and analyzed, as well as their management. Likewise, the aforementioned process must provide that the board of directors of the investment fund management company hired by the Hedge Fund is informed regarding each new product that is authorized.

2.- The board of directors of the investment fund management company hired by the Hedge Fund must approve a risk administration manager, different from the areas or personnel taking risks.

The purpose of the risk administration manager, regarding Derivatives Transactions, will be:

a) To identify, measure, evaluate, and monitor market, credit (counterparty and credit valuation adjustment), liquidity, operational (such as technological and legal), information security, climate, and environmental risks, and other risks considered relevant for the Hedge Fund, arising from these instruments, which must be documented through policies, procedures, and methodologies;

b) To communicate to the board of directors of the investment fund management company hired by the Hedge Fund, as soon as known, any deviation from the established exposure limits in order to carry out operations that manage, transfer, eliminate, or mitigate risks;

c) To report, with the frequency deemed appropriate, to the board of directors of the investment fund management company hired by the Hedge Fund, regarding positions in Derivatives Transactions and risks taken by the Hedge Fund. For the fulfillment of its functions, the risk administration manager must have access, when required, to the operation and support systems or tools, and

85 OFFICIAL GAZETTE Tuesday, December 17, 2024

d) To establish approval mechanisms, by the board of directors of the investment fund management company hired by the Hedge Fund, regarding the general process for entering into Derivatives Transactions of a type other than those already authorized, in a different Market, or with new Underlyings. These mechanisms must contain, at a minimum, an analysis that allows the identification of risks associated with these new operations, taking into consideration the complexity of the Derivatives Transaction in question.

3.- The investment fund management company hired by the Hedge Fund must have a contingency action procedure that allows it to act when it is detected that operation and control policies and procedures, or exposure limits, are deficient, or when violations of applicable laws, standards, or circulars occur. Additionally, a business continuity plan must be in place to guarantee that operations are not interrupted in the face of unexpected events.

4.- The board of directors of the investment fund management company hired by the Hedge Fund must ensure that personnel involved in the operation, handling, and control of Derivatives Transactions maintain a continuous training program, the content of which must include aspects related to regulations and internal policies related to Derivatives Transactions, business continuity plans, and, in general, topics related to financial and operational risks associated with these instruments. Furthermore, the aforementioned personnel must be familiar with operation and control policies and procedures, as well as the ethical standards to which they are subject.

II. OPERATION REQUIREMENTS

5.- The Hedge Fund must have a manager with recognized experience in the celebration of Derivatives Transactions and, at least, two operators, who must hold a valid certification related to the celebration of Derivatives Transactions, issued by an exchange, or an association or recognized evaluating entity.

6.- The Hedge Fund must have systems or tools that allow for the systematic and timely measurement, monitoring, and supervision of the activity of personnel who carry out the celebration of Derivatives Transactions, clearly identifying who entered into the transactions in question.

7.- The Hedge Fund must have systems or tools that allow operators to monitor the positions assigned to them, obtain the theoretical valuation of the Derivatives Transactions they have entered into, and verify compliance with exposure limits, both prior to and after entering into new Derivatives Transactions.

8.- The Hedge Fund must have systems or tools that allow for the processing of Derivatives Transactions, valuation, and risk control, in real time.

9.- The Hedge Fund must establish valuation models consistent with the technology developed to date. These models must be made known to the personnel responsible for confirming and settling transactions. The board of directors of the investment fund management company hired by the Hedge Fund must authorize the valuation models and their modifications, as well as carry out an annual evaluation and validation of the models by experts who are independent of those who developed said models and of the personnel on the Derivatives Trading desks. Modifications to both the models and their parameters must be documented and indicate the corresponding justifications.

III. INTERNAL CONTROL REQUIREMENTS

III.1 General.

10.- The activities and responsibilities of personnel involved in the negotiation of Derivatives Transactions, as well as personnel dedicated to the Confirmation and Settlement of said transactions, must be adequately defined based on a job profile established by the Hedge Fund. Conflicts of interest between personnel responsible for transaction execution and operational support must be avoided.

11.- Operation and control policies and procedures must be established in writing, such that they allow for the correct execution of the functions and responsibilities of personnel involved in the celebration of Derivatives Transactions. Procedures in case of early termination events must be contemplated, including default events or netting agreements, or any other mechanism by which the parties to a particular Derivatives Transaction have agreed to extinguish their obligations totally or partially in advance. The policies and procedures must be made known to all personnel involved in the celebration of Derivatives Transactions.

12.- Procedures must be established to ensure that all negotiated transactions are covered by a signed master contract, and are properly documented, confirmed, registered, and accounted for.

13.- The technological infrastructure, including automated data processing systems, risk management systems, and valuation models, must have adequate backup and control that includes data recovery, in the event of an operational contingency, up to the moment prior to its occurrence.

III.2 Operation, registration, and verification.

14.- Policies, procedures, and control mechanisms must be established and documented, which serve as evidence of all terms of the transactions agreed upon by the parties, in order to ensure the truthfulness and authenticity of the negotiated Derivatives Transactions. Additionally, the necessary procedures must be established to document the registration of incidents in daily operations, including those that have been resolved, and to inform the risk administration manager whenever there are significant incidents. Finally, controls must be established to guarantee the sending of Confirmations by their counterparties, as well as to implement escalation policies, for cases where Confirmation is not received from said counterparties.

15.- Only support personnel may receive Confirmations from counterparties and proceed with their execution and settlement under duly authorized instructions and verified amounts. Confirmations must be duly cross-referenced with the information provided by operational personnel and, in case of doubt, with the corresponding records.

16.- The Hedge Fund must establish procedures to verify semi-annually that transactions are properly documented, registered, accounted for, and confirmed.

III.3 Valuation.

17.- The risk administration manager must have access to reliable external information sources, allowing them to know market movements at all times, as well as to value the outstanding Derivatives Transactions of the Hedge Fund.

III.4 Accounting.

18.- The accounting manager must reconcile, or approve daily, accounting records against operational records, including balances and valuation, leaving documentary evidence of daily reconciliations and, in case of discrepancies, the follow-up performed. Accounting guidelines related to Derivatives Transactions must be established in accordance with applicable accounting criteria, and they must be accounted for in accordance with said guidelines.

19.- The Derivatives Transaction Settlement Manager must have written procedures to investigate unsettled transactions, both on the part of the Hedge Fund itself, indicating the contingent causes that motivated its non-settlement, and in the case where its counterparties fail to settle with the Hedge Fund. If both situations occur, the results must be reported to the board of directors of the investment fund management company hired by the Hedge Fund, maintaining systematic records of their investigation.

III.5 Legal.

20.- The Hedge Fund must have procedures to verify master contracts, sheets, and other formats that bind the Hedge Fund and the counterparty to the due fulfillment of their obligations before they are signed, as well as the updating of personnel authorized to negotiate and confirm Derivatives Transactions. The procedures must define the person responsible for the custody, administration, and monitoring of the cited documents. In the aforementioned contracts, procedures for the valuation of Derivatives Transactions, as well as the designation of the calculation agent and the dispute resolution process, must be established.”

TRANSITIONAL

SINGLE. - The provisions of this Circular shall enter into force on the Business Day following its publication in the Official Gazette of the Federation.

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Mexico City, December 2, 2024.- BANK OF MEXICO: Director General of Central Banking Operations, Gerardo Israel García López.- Rubric.- Director General of Payment Systems and Market Infrastructures, Othón Martino Moreno González.- Rubric.- Director General of Financial System Affairs, José Luis Negrín Muñoz.- Rubric.- Director of Central Banking Provisions, María Teresa Muñoz Arámburu.- Rubric.- Director of Financial System Information, Juan Fernando Avila Embriz.- Rubric.

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.