Circular 18/2011 — Modifies Circular 5/2011

(First Section) OFFICIAL GAZETTE Friday, July 29, 2011 BANCO DE MEXICO CIRCULAR 18/2011, addressed to credit institutions and brokerage houses regarding modifications to the procedure to act as Market Makers for government securities.

A logo is placed at the margin, stating: Bank of Mexico.

CIRCULAR 18/2011

TO CREDIT INSTITUTIONS AND BROKERAGE HOUSES:

SUBJECT: MODIFICATIONS TO THE PROCEDURE TO ACT AS MARKET MAKERS FOR GOVERNMENT SECURITIES

The Bank of Mexico, in its capacity as the financial agent of the Federal Government, with the objective of complying with the instruction of the Ministry of Finance and Public Credit to make known to these entities various modifications to the procedure to act as market makers for government securities in order to promote transparency in the measurement of their activity, attaches hereto a copy of Office No. 305.-105/2011, issued by said Ministry, which will enter into force on August 1 next.

The foregoing, based on what is provided in Articles 28, paragraphs sixth and seventh, of the Political Constitution of the United Mexican States; 3rd, fraction III, 7th, fraction I, and 10 of the Bank of Mexico Law; 22 of the Law for Transparency and Ordering of Financial Services; as well as 4th, first paragraph, 8th, paragraphs fourth and seventh, 10th, first paragraph, 14 Bis in relation to 17th, fraction I, and 19th, fraction VII, of the Internal Regulations of the Bank of Mexico, which grant it the authority to issue provisions through the General Legal Directorate and the Operations Directorate, respectively; as well as Article 2 of the Agreement on the Affiliation of the Administrative Units of the Bank of Mexico, fractions VII and XI.

Mexico, D.F., July 28, 2011.- BANCO DE MEXICO.- The General Legal Director, Héctor Reynaldo Tinoco Jaramillo.- Signature.- The Operations Director, Jaime José Cortina Morfín.- Signature.

“ At the margin, a seal with the National Coat of Arms, stating: United Mexican States.- Ministry of Finance and Public Credit.- Undersecretariat of Finance and Public Credit.- Public Credit Unit.- Office No. 305.- 105/2011.

Mexico, D.F., July 26, 2011.

Lic. Francisco Javier Duclaud González de Castilla General Director of Central Banking Operations Bank of Mexico Present.

The Ministry of Finance and Public Credit, through the Public Credit Unit, based on Articles 4th, fractions I and V, of the General Public Debt Law; 3rd, fraction III, 7th, fraction I, 8th, and 10 of the Bank of Mexico Law; 17th, 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 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, and considering that it is convenient to promote transparency in the measurement of Market Makers and UDIBONOS Market Makers.

Has resolved to modify Office 305.-027/2011 of January 27, 2011, in sections 1; 2.3; 3.2; 4.2, first paragraph, and 4.2.5; 5.3; 6.2, and 7.2.4, to read as follows:

“1. DEFINITIONS . . . I.- . . .

Friday, July 29, 2011 OFFICIAL GAZETTE (First Section)

II.- REVISABLE BONDS: Federal Government Development Bonds of the United Mexican States denominated in national currency with a coupon with a revisable interest rate. III.- BONDS: Federal Government Development Bonds of the United Mexican States denominated in national currency with a coupon with a fixed interest rate. IV.- to V.- . . . VI.- Brokerage Houses: companies that administer mechanisms to facilitate operations with securities between Financial Intermediaries, regulated by provisions issued by the National Banking and Securities Commission, as well as those that modify or replace them. VII.- . . . VIII.- Business Days: days of the week on which financial entities are not obliged to close their doors or suspend operations, in terms of general provisions issued for such effect by the National Banking and Securities Commission. IX.- to XX.- . . . XXI.- Clientele Trading Systems: mechanisms aimed at facilitating operations with securities of Financial Intermediaries with the investing public. XXII.- Auctions: auctions for the placement of CETES, BONOS, and UDIBONOS, as applicable, carried out in accordance with the provisions provided in Annex 6 of Circular 2019/95, Annex 3 of Circular 1/2006, and section CB.5 of Circular 115/2002, or those that replace them, issued by the Bank of Mexico, addressed to multiple banking institutions, development banking institutions, and brokerage houses, respectively. XXIII.- UCP: the Public Credit Unit of the Ministry. XXIV.- UDIBONOS: Federal Government Development Bonds denominated in Investment Units.”

2. FINANCIAL INTERMEDIARIES THAT MAY ACT AS MARKET MAKERS

“2.3 The IA will comprise the volume of Operations in the Primary Market, Clientele Operations, and Intermediary Operations conducted by Market Makers and Applicants. The volume of CETES and BONOS operations will be calculated taking into account the information provided by both Brokerage Houses, Clientele Trading Systems, as well as Market Makers and Applicants. Operations carried out between Financial Intermediaries belonging to the same financial group will be excluded from this calculation. Additionally, the Bank of Mexico may exclude from the calculation of the IA and the incentives and penalties referred to in Annex 1, operations that it considers do not foster liquidity and depth in the secondary government securities market, or that do not make price formation in said secondary market more efficient. The Bank of Mexico will inform the Ministry of the type of operations that have been excluded from the calculation.”

3. OBLIGATIONS OF MARKET MAKERS

“3.2 Quote buy and sell yield rates for CETES and BONOS, through Brokerage Houses and Clientele Trading Systems, each Business Day during the hours between 9:00 and 13:00, for a minimum amount of $20,000,000.00 (TWENTY MILLION PESOS 00/100 M.N.) in nominal value. Such quotes must be presented for all terms of CETES and BONOS. The Ministry reserves the right to specify, in view of prevailing market conditions, the maximum level of the differential between the quoted buy and sell yield rates for each of the terms.”

4. RIGHTS OF MARKET MAKERS

“4.2 Market Makers may carry out securities lending operations on CETES and BONOS with the Bank of Mexico, in its capacity as the financial agent of the Federal Government, under the terms determined by said Bank, adhering to the following: . . .

“4.2.5 Market Makers must guarantee securities lending operations with CETES, BONOS, REVISABLE BONDS, UDIBONOS, BREMS, or BPAS. The value of the titles given as collateral must at all times be equal to or greater than 102% of the sum of the value of the BONOS or CETES subject to the loan plus the portion of the premium charged through Indeval. For this purpose, the CETES and BONOS subject to the securities loan, as well as the values given as collateral, will be valued daily according to the last price vector determined by the Bank of Mexico, which will be made known to Market Makers by Indeval through the electronic procedure for the celebration of specialized securities lending operations called “VALPRE-E”. ” . . .”

5. UDIBONOS MARKET MAKERS

“5.3 The IAU will comprise the volume of Operations in the Primary Market, Clientele Operations, and Intermediary Operations conducted by Market Makers. The volume of operations will be calculated taking into account the information provided by both Brokerage Houses, Clientele Trading Systems, as well as the Market Makers themselves. Operations carried out between Financial Intermediaries belonging to the same financial group will be excluded from this calculation. Additionally, those operations that the Bank of Mexico considers do not foster liquidity and depth in the UDIBONOS secondary market, or that do not make price formation in said secondary market more efficient, may be excluded from the IAU calculation. The Bank of Mexico will inform the Ministry of the type of operations that have been excluded from the calculation.”

6. OBLIGATIONS OF UDIBONOS MARKET MAKERS

“6.2 Quote buy and sell yield rates for UDIBONOS through Brokerage Houses and Clientele Trading Systems, each Business Day during the hours between 9:00 and 13:00, for a minimum amount of $20,000,000.00 (TWENTY MILLION PESOS 00/100 M.N.) in nominal value. Such quotes must be presented for all terms of UDIBONOS. The Ministry reserves the right to specify, in view of prevailing market conditions, the maximum level of the differential between the quoted buy and sell yield rates for each of the terms.”

7. RIGHTS OF UDIBONOS MARKET MAKERS

“7.2.4 UDIBONOS Market Makers must guarantee securities lending operations with CETES, BONOS, REVISABLE BONDS, UDIBONOS, BREMS, or BPAS. The value of the titles given as collateral must at all times be equal to or greater than 102% of the sum of the value of the UDIBONOS subject to the loan plus the agreed premium. For this purpose, the values given as collateral, as well as the UDIBONOS subject to the loan, will be valued daily according to the last price vector determined by the Bank of Mexico, which will be made known to UDIBONOS Market Makers by Indeval, through the electronic procedure for the celebration of specialized securities lending operations called “VALPRE-E”. ”

TRANSITORY PROVISIONS

FIRST.- The provisions of this Office shall enter into force on August 1, 2011.

SECOND.- Existing contracts signed between the Bank of Mexico and Market Makers will retain their validity; therefore, no new contracts need to be signed due to the provisions of this Office.

Finally, we instruct the Bank of Mexico to, in its capacity as the financial agent of the Federal Government, make known to Financial Intermediaries the provisions of this Office.

Without further particular, I renew to you the assurances of my most distinguished consideration.

EFFECTIVE VOTING. NO REELECTION.

The Head, Lic. Alejandro Díaz de León Carrillo Signature

c.c.p. Lic. Gerardo Rodríguez Regordosa.- Undersecretary of Finance and Public Credit.- Present. Ing. Octavio Alfredo Lara Calderón.- Deputy General Director of Capture.- Present.”

Friday, July 29, 2011 OFFICIAL GAZETTE (First Section)

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