Circular 16/2024 — Modifications to Rules for Securities Lending Operations

DIARIO OFICIAL Tuesday, December 17, 2024

CIRCULAR 16/2024 addressed to credit institutions, brokerage houses, investment funds, specialized investment societies for retirement funds, insurance institutions, surety institutions, and the National Agricultural, Rural, Forestry and Fisheries Development Financial Institution, regarding the Modifications to the Rules to which credit institutions, brokerage houses, investment funds, specialized investment societies for retirement funds, insurance institutions, surety institutions, and the National Agricultural, Rural, Forestry and Fisheries Development Financial Institution must adhere in their securities lending 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 16/2024

TO CREDIT INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT FUNDS, SPECIALIZED INVESTMENT SOCIETIES FOR RETIREMENT FUNDS, INSURANCE INSTITUTIONS, SURETY INSTITUTIONS AND THE NATIONAL FINANCIAL INSTITUTION FOR AGRICULTURAL, RURAL, FORESTRY AND FISHERIES DEVELOPMENT:

SUBJECT: MODIFICATIONS TO THE RULES TO WHICH CREDIT INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT FUNDS, SPECIALIZED INVESTMENT SOCIETIES FOR RETIREMENT FUNDS, INSURANCE INSTITUTIONS, SURETY INSTITUTIONS AND THE NATIONAL FINANCIAL INSTITUTION FOR AGRICULTURAL, RURAL, FORESTRY AND FISHERIES DEVELOPMENT MUST ADHERE IN THEIR SECURITIES LENDING 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 public's interests, and in compliance with the "Decree reforming, adding and repealing various provisions of the Securities Market Law and the Investment Funds Law", published in the Official Gazette of the Federation on December 28, 2023, has deemed it necessary to establish rules applicable to hedge funds in their securities lending operations.

Therefore, 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, 22 of the Law for Transparency and Ordering of Financial Services, 53, third paragraph, fraction II, and 81, second paragraph, of the Credit Institutions Law, 87-D, fourth paragraph, of the General Law of Credit Auxiliary Organizations and Activities, 176, first paragraph, of the Securities Market Law, 15, second paragraph, of the Investment Funds Law, 48, fraction VI, of the Law for Retirement Savings Systems, 132 and 157 of the Insurance and Surety Institutions Law, 1, 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 Banking Operations, the General Directorate of Payment Systems and Market Infrastructures, the General Directorate of Financial System Affairs

Tuesday, December 17, 2024 OFFICIAL GAZETTE

of the Financial System, the Directorate of Central Banking 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 "Central Securities Counterparty", "Securities Depository", "Foreign Financial Entities", "Investment Funds" and "Reference Countries" contained in numeral 1, as well as numeral 3.2, and add the definitions of "Prime Broker", "Foreign Hedge Funds" and "Covered Investment Funds" to numeral 1, as well as paragraphs second and third to numeral 2.2, of the "Rules to which credit institutions, brokerage houses, investment funds, specialized investment societies for retirement funds, insurance institutions, surety institutions and the National Agricultural, Rural, Forestry and Fisheries Development Financial Institution must adhere in their securities lending 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, INSURANCE INSTITUTIONS, SURETY INSTITUTIONS AND THE NATIONAL FINANCIAL INSTITUTION FOR AGRICULTURAL, RURAL, FORESTRY AND FISHERIES DEVELOPMENT MUST ADHERE IN THEIR SECURITIES LENDING OPERATIONS

"1. DEFINITIONS ... Prime Broker: Foreign Financial Entities established 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, in English), that provide comprehensive services to Covered Investment Funds for the execution of Securities Lending operations; among others, the provision of liquidity through financing operations; treasury, including the management of cash flows; as well as those related to the custody and administration of Shares, Securities and collateral. ... 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. ... Foreign Financial Entities: Those authorized to act as financial entities by the competent authorities of the countries in which they are established, including Foreign Hedge Funds and Prime Brokers. ... Foreign Hedge Funds: Entities, including vehicles organized as trusts or similar figures, established 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, with the aim of distributing among those persons the profits or, in their case, 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 will be those established in countries of the European

OFFICIAL GAZETTE Tuesday, December 17, 2024

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, in English).

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 that, 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 ... 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 Securities Loans 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."

"3.2 Investment Funds and Siefores may enter into Securities Loans with Shares or Securities, as applicable, that allow them by their law, as well as the provisions emanating from it and are provided for in their investment regime, without prejudice to the restrictions applicable to counterparties in relation to the Shares and Securities with which they may enter into Securities Loans."

TRANSITIONAL PROVISIONS

FIRST.- This Circular will enter into force on the next business day following its publication in the Official Gazette of the Federation.

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 deemed convenient, through general provisions it establishes limits on the amounts of Securities Loans entered into by Covered Investment Funds.

Mexico City, December 2, 2024.- BANK OF MEXICO: General Director of Central Banking Operations, Gerardo Israel García López.- Rubric.- General Director of Payment Systems and Market Infrastructures, Othón Martino Moreno González.- Rubric.- General Director 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.

Tuesday, December 17, 2024 OFFICIAL GAZETTE

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.