Circular 18/2020 — Corporate Bond Repo Operations with the Bank of Mexico to Cover Liquidity Needs

Tuesday, May 19, 2020 OFFICIAL GAZETTE
BANK OF MEXICO
CIRCULAR 18/2020 addressed to Multiple Banking and Development Banking Institutions, regarding Rules applicable to corporate bond repurchase operations with the Bank of Mexico to cover liquidity needs.

At the margin a logo, which says: Bank of Mexico.- "2020, Year of Leona Vicario, Meritorious Mother of the Fatherland".

CIRCULAR 18/2020
TO MULTIPLE BANKING AND DEVELOPMENT BANKING INSTITUTIONS:
SUBJECT: RULES APPLICABLE TO CORPORATE BOND REPURCHASE OPERATIONS WITH THE BANK OF MEXICO TO COVER LIQUIDITY NEEDS.

The Bank of Mexico, considering the effects that the COVID-19 pandemic has had on the global economy, and on the behavior of the financial markets in our country, as well as on the foreign exchange and fixed income markets that continue to show little depth, lower liquidity, and a deterioration of operating conditions, with the object of continuing to promote the sound development of the financial system and ensuring its stability, as well as promoting the proper functioning of payment systems and avoiding disturbances in them, has considered it necessary to maintain the provision of liquidity in national currency to credit institutions, in order to improve the functioning of national markets, strengthen credit granting channels in the economy, and promote the orderly behavior of our country's debt and exchange markets. With this, this Central Institute will contribute to creating the conditions that facilitate credit institutions to fulfill their priority function of providing financing to the economy, which is why it has resolved to offer credit institutions the celebration of corporate bond repurchase operations with the objective of providing liquidity to the debt market and allowing multiple banking and development banking institutions to obtain liquidity without the need to sell their corporate titles under the stress conditions prevailing in the markets.

For the above, based on articles 25, second paragraph, 28, paragraphs sixth and seventh, of the Political Constitution of the United Mexican States, 7, fractions I, II and X, 8, 14, first paragraph, 15, 16, 24, 26, first paragraph, and 36, of the Bank of Mexico Law, 54 and 96 Bis, of the Credit Institutions Law, 22 of the Law for Transparency and Orderly Financial Services, 4, first paragraph, 8, paragraphs fourth and eighth, 10, 12, first paragraph, in relation to 19 Bis, fractions I and V, 14, first paragraph, in relation to 25, fraction VII, 14 Bis, first paragraph, in relation to 17, fraction I, and 14 Bis 1, in relation to 25 Bis 1, fraction IV, 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 Financial Stability, the General Legal Directorate, and the General Directorate of Affairs of the Financial System, respectively, as well as Second, fractions I, IV, VI and X, of the Agreement on the Assignment of Administrative Units of the Bank of Mexico, it has resolved to issue these Rules, in accordance with the following provisions:

RULES APPLICABLE TO CORPORATE BOND REPURCHASE OPERATIONS WITH THE BANK OF MEXICO TO COVER LIQUIDITY NEEDS

1. Definitions.
   For the purposes of these Rules, the terms used in them, in singular or plural, shall have the meanings indicated below, without prejudice to the different treatment given to similar terms in other regulations:

Credit Quality Criterion on Global Scale:
a) that applicable to the titles offered for repurchase under these Rules, according to which they must have, at least, two ratings, on a global scale, issued by the Securities Rating Agencies Moody’s, S&P Global Ratings, Fitch Ratings and HR Ratings equal to or higher than Ba1 / BB+ / BB+ / HR BB+ (G), respectively or, in the case of short-term titles, to the respective ratings equal to or higher than P-2 / A-2 / F2 / HR2 (G), or to a rating equivalent to the aforementioned ones assigned by any other Securities Rating Agency.

Credit Quality Criterion on National Scale:
a) that applicable to the titles offered for repurchase under these Rules according to which they must have, at least, two ratings, on a national scale, issued by the Securities Rating Agencies Moody’s, S&P Global Ratings, Fitch Ratings and HR Ratings equal to or higher than A2.mx / mxA / A(mex) / HR A, respectively or, in the case of short-term titles, to the respective ratings equal to or higher than MX-2 / mxA-2 / F2(mex) / HR2 or to a rating equivalent to the aforementioned ones assigned by any other Securities Rating Agency.

Single Account: the national currency demand deposit bank account that the Bank of Mexico maintains for each of the Institutions in accordance with what is provided in the Operating Provisions.

Banking Business Days:
a) the days on which Institutions are not obliged to close their doors or suspend their operations, in terms of the general provisions issued for such effect by the National Banking and Securities Commission.

Eligible Currency: the Australian Commonwealth dollar, Canadian dollar, United States of America dollar, New Zealand dollar, European Union euro, United Kingdom of Great Britain and Northern Ireland pound sterling and Japanese yen.

Operating Provisions:
a) the Provisions applicable to the Operations of Credit Institutions, Regulated Multiple-Object Financial Companies that Maintain Patrimonial Links with Credit Institutions and the National Agricultural, Rural, Forestry and Fisheries Development Financial Institution, issued by the Bank of Mexico through Circular 3/2012, published in the Official Gazette of the Federation on March 2, 2012, as they have been modified by subsequent resolutions.

Indeval: S.D. Indeval, Institution for the Deposit of Securities, S.A. de C.V.

Institutions: multiple banking or development banking institutions, as applicable.

Securities Rating Agency:
a) any of the anonymous societies authorized by the National Banking and Securities Commission to act with such character, in terms of what is provided by the Securities Market Law, as well as their foreign subsidiaries that grant credit ratings to the titles subject to repurchase in accordance with these Rules.

Manual: the operating manual to implement the repurchase operations provided for in these Rules that the Bank of Mexico makes known to Institutions through the internet portal located at the address: <http://webdgobc>.

SIAC-BANXICO: the Bank of Mexico Account Holder Attention System.

Corporate Titles:
a) those indicated in section 2.2, heading "Titles subject to repurchase".

UDIS: the investment units referred to in the Decree by which obligations that may be denominated in Investment Units are established and Reform and Adds various provisions of the Federal Tax Code and the Income Tax Law published in the Official Gazette of the Federation on April 1, 1995.

2. General terms and conditions.
   2.1 Conditions for granting financing.
   Institutions interested in celebrating, in their capacity as reported parties, repurchase operations with the Bank of Mexico in accordance with these Rules must submit their requests on the date and within the hours indicated in the calls for proposals that the latter makes known to them for these effects. The Bank of Mexico will make known to Institutions each of the aforementioned calls for proposals at least one Banking Business Day in advance of the date on which it will receive the indicated requests.

The calls for proposals will be made known through SIAC-BANXICO or on the Bank of Mexico's internet site located at the address << https://www.banxico.org.mx/ >>. In the event that said system is not available, the Bank of Mexico may make known the calls for proposals by any other authorized electronic, computing or telecommunications medium for this effect, as it makes known to Institutions. These calls for proposals will specify the date and time at which Institutions may request the execution of the repurchase operations subject to these Rules, as well as the available amount determined for said operations. The Bank of Mexico will issue the aforementioned calls for proposals at least once a week, during the validity of these Rules or until the maximum amount determined by it has been covered.

Institutions must submit the aforementioned requests through SIAC-BANXICO on the date and time indicated in the respective call for proposals. The access, identification, and, if applicable, operation keys established for the use of SIAC-BANXICO will substitute the autograph signature of the representative of the respective Institution with one of an electronic character, so that the documentary or technical records generated or presented as a result of the use of said data will produce the same effects that the laws grant to documents signed by the parties and, consequently, will have equal probative value.

In the event that SIAC-BANXICO is not available, Institutions must submit the indicated requests by the electronic, computing or telecommunications medium authorized for this effect by the Bank of Mexico, as it makes known in the respective call for proposals. In this case, Institutions must submit the requests in terms of the format attached to these Rules as Annex 1, on the date and time indicated in the respective call for proposals and in accordance with the procedure established in the Manual. Such request presented by the medium referred to in this paragraph must have the advanced electronic signature of the legal representative of the Institution who has the authority to exercise acts of domain, whose data are susceptible of verification through the corresponding digital certificate issued by the Tax Administration Service, or, by means of a written document presented at the domicile of the Bank of Mexico containing the autograph signature of the legal representative of the Institution who has the authority to exercise acts of domain.

The Bank of Mexico will attend to the requests presented by Institutions in accordance with what is provided in the preceding paragraphs and assign them the amount they have requested, which it will make known to Institutions through SIAC-BANXICO or any other electronic, computing or telecommunications medium authorized for this effect by the Bank of Mexico, as it makes known in the respective call for proposals. In the event that the total amount of requests exceeds the available amount, the assignment will be carried out pro rata, that is, proportionally to the bids presented by each Institution. The availability of resources corresponding to the repurchases celebrated based on such assignment will be subject to the prior transfer of the titles subject to such repurchases in the respective securities deposit accounts that Indeval maintains for the Bank of Mexico or, in the case of those titles denominated in Eligible Currencies, to the corresponding foreign custodian accounts. The applicable accounts, as well as the applicable hours, will correspond to those specified in the Manual. The titles subject to the repurchase must be deposited on the Banking Business Day following that on which the respective Institution has presented the request that has been assigned in the terms provided in the Manual.

Regarding development banking institutions, only those authorized to do so in accordance with applicable regulations may celebrate the aforementioned repurchases.

Institutions that have celebrated repurchase operations in accordance with these Rules may submit new requests to the Bank of Mexico on the dates and times that it makes known in subsequent calls for proposals, even in cases where such operations remain in effect on the dates when the new operations are celebrated.

2.2 Repurchase operations.
For the Institution in question to be able to celebrate repurchases with the Bank of Mexico in accordance with these Rules, it must previously sign the respective contract with it, which will have, at least, the following characteristics:

Repo Provider: The Bank of Mexico.
Repo Taker: The Institution that meets the requirements to celebrate repurchases with the Bank of Mexico in accordance with these Rules.

Term for the celebration of the repurchase operation: The Banking Business Day immediately following that on which the respective Institution has presented its request to the Bank of Mexico, on the date indicated for this purpose in the respective call for proposals, subject to the delivery of the titles subject to the repurchase, in accordance with what is established in section 2.1.

Term of the repurchase: Three months, which may not exceed 93 calendar days, in accordance with what is determined in the call for proposals referred to in section 2.1.

Titles subject to the repurchase: Corporate debt titles denominated in national currency, in UDIS or in Eligible Currencies, deposited in Indeval or in foreign custodian accounts, that meet the Credit Quality Criterion on National Scale or the Credit Quality Criterion on Global Scale, as applicable, and have been issued by:
i) Private law legal entities resident in Mexico, whether financial, other than Institutions, and non-financial, that do not form part of the same financial group, business group or consortium to which the reported Institution belongs, or ii) Trust institutions of trusts through which the persons indicated in subsection i) issue said debt titles in the form of fiduciary stock certificates that represent the right of their holders to receive the payment of capital and, if applicable, interest or returns.

The trusts referred to in subsection ii) above must be constituted in accordance with the Securities Market Law and must meet the following characteristics:
a. The holders of the respective stock certificates must be placed in the first place of priority for the payment of the respective certificates and no holder will be subordinated to the payment of other holders. b. The trusts must be irrevocable.
c. The trust must not include credit derivative products in its structure or, in any other way, contemplate the use of said products for the payment of the respective fiduciary stock certificates.

Additionally, titles subject to the repurchases provided for in these Rules may be those values issued abroad through some legal figure that produces the effects of a special purpose vehicle, in accordance with the laws of the respective jurisdiction, provided that they meet the characteristics previously established and, exceptionally, in the event that the special purpose vehicle is not subject to an express clause of irrevocability, the legal instrument of its constitution must expressly provide that any modification to said instrument or to the conditions of the vehicle or the values issued will only be for the benefit of the holders of said values.

Regarding the titles corresponding to the trusts indicated in this section 2.2, subsection ii), their issuance instruments must include an express clause by which the entities in charge of whom the collective credit object of said titles has been constituted is also obliged to cover the amounts of the debts secured by said titles that are not paid by the respective trust and other parties that, if applicable, have assumed said obligation.

On the other hand, the titles referred to in subsection ii) above must not include structured bank titles provided for in Title Two, Chapter I, Section I, Subsection G, of the Operating Provisions, as well as other titles implemented with similar characteristics.

The Institution that presents the titles for the execution of the repurchase provided for in this section must verify that they meet the characteristics previously established for each of them, without prejudice to the review that the Bank of Mexico must carry out.

The maturity date of the titles subject to repurchase must be subsequent to that corresponding to the expiration date of the repurchase term.

The Bank of Mexico will make known to Institutions the valuation of the titles to be reported and the discount factors that the Bank itself determines and makes known through the internet portal it maintains at the address: << http://webdgobc >>.

In any case, the Bank of Mexico, taking into account the date of issuance and placement of the titles and the depth and conditions prevailing in the market in which said titles are traded, may not accept titles in repurchase operations, as well as those that do not have an updated valuation at market prices, that have not been placed among several investors or that have not been placed through a public offering. In the case of titles denominated in Eligible Currencies, the Bank of Mexico may not accept those with which it is not able to carry out the corresponding operations within the term to perfect the respective repurchase.

Price of the repurchase: The amount in national currency equivalent to the value of the titles subject to the repurchase made known by the Bank of Mexico at the time of its perfection, adjusted by the discount factors that the Bank itself determines and makes known through the internet portal it maintains at the address: << http://webdgobc >>.

Premium: That resulting from the following formula:

Where:
Interest Rate: will be equivalent to the result of multiplying the factor 1.1 (one point one) by the average, during the Term of the repurchase, of the one-day interbank interest rate that the Government Board of the Bank of Mexico has determined as the target rate for monetary policy purposes, expressed annually and in percent with rounding to two decimals, made known on the internet electronic page of the Bank itself during each day of the validity of the repurchase. Amount: the amount agreed for the corresponding repurchase, equivalent to the Price of the repurchase. Days: the number of calendar days that elapse between that on which the repurchase is perfected and the Banking Business Day on which it is settled.

The payment of the Premium will be made on the day of maturity of the operation, through a charge that the Bank of Mexico makes in the Single Account it maintains for the reported Institution.

Credit of resources: Once the Institution in question has signed the contract and presented the request to celebrate the corresponding repurchase in accordance with section 2.1 above, said Institution must transfer the titles subject to the repurchase, in accordance with what is indicated in this section, to the securities deposit account that Indeval maintains for the Bank of Mexico, or in foreign custodian accounts, in terms of what is established in the Manual.

Once the delivery of said titles has been carried out through the transfer referred to in the preceding paragraph, the Bank of Mexico, during the hours established in the Manual, will make the credit of the amount equivalent to the Price of the repurchase in question in the Single Account it maintains for the reported Institution.

The value of the titles delivered by the reported Institution to the Bank of Mexico, adjusted by the discount factors, must cover in its entirety, both the Price of the repurchase and the estimated Premium and any other agreed expenses, in accordance with what is established in these Rules.

Valuation of the titles subject to the repurchase. The reported Institution must deliver to the Bank of Mexico, by virtue of the repurchase in question, titles whose valuation adjusted by the discount factors must be equal to or greater, at all times, to the Price of the repurchase plus the estimated Premium for the repurchase operation and any other agreed expenses. For these purposes, the value of the titles will be determined in accordance with the prices and the corresponding discount factors that the Bank of Mexico makes known to Institutions, through the internet portal located at the address: <http://webdgobc>.

For the case provided for in the preceding paragraph, the estimated Premium will be calculated as follows:
On the day of perfection of the repurchase in question, the estimated Premium will be that resulting from applying the formula indicated above, for which the target rate for monetary policy purposes that is made known on the Bank of Mexico's internet electronic page, from the date of perfection and until the valuation date, will be taken, assuming, for the purposes of this calculation, that said rate will remain constant during the remaining term of the repurchase. Additionally, in the event that, from the day of perfection of the repurchase and until the agreed date of expiration of the repurchase term, the aforementioned target interest rate is modified by decision of the Government Board of the Bank of Mexico, the value of said rate will be taken as applicable for each of the days from that on which it has been made known and until the agreed date of expiration of the repurchase term. Without prejudice to the foregoing, the Premium that the reported Institution must pay to the Bank of Mexico will be that resulting from the calculation made, at the expiration of the repurchase term, in accordance with what is indicated in the heading Premium of this section.

The value of the titles subject to the repurchase will be determined daily, until the repurchase is settled, in accordance with the valuation carried out by the Bank of Mexico and, derived from such determination, the following will be done:
a) If the value of the titles, when applying the corresponding discount factor, results in less than the sum of the Price of the repurchase, the estimated Premium and any other agreed expenses, the Bank of Mexico

DIARIO OFICIAL Tuesday, May 19, 2020 notify such situation to the Institution in question, which must send a communication within the established timeframe and terms set forth in the Manual, indicating the Corporate Bonds it will grant to the Bank of Mexico to cover the amount of the corresponding difference. The Institution must carry out, on the same Banking Business Day that the Bank of Mexico notifies that the shortfall is applicable, the transfer of said Corporate Bonds to the securities deposit account that the Bank of Mexico maintains at Indeval that is applicable or, in the case of those bonds denominated in Eligible Currencies, to the custody accounts abroad that the Bank of Mexico makes known, for these purposes, within the hours that Institutions may consult in the Manual. b) If the value of the bonds, upon applying the corresponding discount factor, results greater than the sum of the Repo Price, the Estimated Premium, and any other agreed expenses, the Institution may request the Bank of Mexico to return the excess bonds, to those granted as the subject bonds of the repo, through a communication sent to the Bank of Mexico in the terms of the Manual. In the event that the Institution does not carry out the transfer of the bonds as referred to in the preceding subsection a), on the following Banking Business Day the repo shall be deemed terminated in advance, in which case the Institution must make a payment for the uncovered amount derived from the corresponding difference between the sum of the Repo Price, the Estimated Premium, and any other agreed expenses, and the value of the bonds, upon applying the corresponding discount factor. Notwithstanding the foregoing, without prejudice to the corresponding conventional penalty for the uncovered amount, the Institution and the Bank of Mexico may enter into a new repo with the remaining bonds that the Institution had previously delivered to this entity for a term equal to the remaining term of the original operation.
3. General Provisions.
3.1 Execution of Contracts.
To execute the repo contract subject to these Rules, interested Institutions must present to the Operations Instrumentation Management of the Bank of Mexico, a certified copy of the deed in which the powers granted to their legal representatives to exercise acts of dominion are recorded, as well as the official identification of said representatives who sign said contracts and the other documents indicated therein.
3.2 Payment of the Repo.
The reported Institution may, prior to the agreed expiration date for the repo it has executed in accordance with these Rules, pay in full or in part the amounts owed by it by virtue of said repo. In these cases, the reported Institution must inform the Bank of Mexico thereof, through a communication prepared for such purposes in accordance with the format provided in Annex 2 of these Rules and during the hours indicated in the Manual.
Once all repos provided for in these Rules have been settled in full, the obligations of the parties shall be extinguished.
As an exception to what is provided in Article 116 of the Operations Provisions, Institutions that execute the repo operations subject to these Rules may not incur overdrafts in their respective Single Accounts not corresponding to guarantees for the payment of said operations. By virtue of the foregoing, in the event that the Bank of Mexico cannot make the respective charge at the maturity of the repo operation in question, the obligation to pay the respective repo shall be considered breached up to the amount not covered by the Institution in question. The Bank of Mexico may abstain from executing a new repo operation with an Institution when this does not comply with the conditions provided in these Rules, with what is stipulated in the respective repo contract, as well as when said Institution fails to comply with the conditions of other operations executed by it with the Bank of Mexico in accordance with the respective Rules issued by this entity to cover liquidity needs.
3.3 Information to the Bank of Mexico.
Institutions shall carry out the acts provided for in these Rules, without prejudice to the Bank of Mexico's authority to require them, through the competent administrative units, the information it requires for the proper fulfillment of its functions.

Tuesday, May 19, 2020 DIARIO OFICIAL
The aforementioned information must be sent in the form and terms that, for this purpose, the aforementioned administrative units make known to them.
Annex 1
Request Format that Institutions must present to the Bank of Mexico Mexico City, on (DAY) of (MONTH) of (YEAR).
Bank of Mexico
Present:
Attention: General Directorate of Central Banking Operations Through this channel, the undersigned, [_ FULL NAME ], in my capacity as [POSITION] of the credit institution named [ FULL DESIGNATION OF THE CREDIT INSTITUTION, INCLUDING, IF APPLICABLE, THE FINANCIAL GROUP TO WHICH IT BELONGS ], on behalf and for the account of said institution, request the Bank of Mexico to grant my represented entity a temporary financing, in terms of what is provided in the "RULES APPLICABLE TO CORPORATE BOND REPO OPERATIONS WITH THE BANK OF MEXICO TO COVER LIQUIDITY NEEDS", issued by this Central Institute through Circular 18/2020, published in the Official Gazette of the Federation on May 19, 2020. The amount of the referred financing that my represented entity requests is $_______________ (amount in letters), pesos, national currency, and the date required for the disbursement of resources by my represented entity is the [ DAY ] of [ MONTH ] of [ YEAR ], subject to the transfer of the subject bonds of the repo in the respective securities deposit accounts that Indeval maintains for the Bank of Mexico or in the custodian abroad that the Bank of Mexico itself indicates. For these purposes, my represented entity accepts to execute the repo operations in the form and terms provided in the aforementioned Circular, as well as in the corresponding contracts. Likewise, my represented entity manifests its agreement with the modifications that, if any, have been made to Circular 18/2020, after the execution of the contract that documents the repo operation with the Bank of Mexico. Likewise, it recognizes that, in the event of a discrepancy between the terms and conditions established in the referred contract and those provided in the said Circular and its respective modifications, which are in force at the time of the present request, the terms and conditions provided in the Circular and its respective modifications shall prevail. Additionally, with the purpose of having agile communication for clarifications or requests for additional information, the Institution designates the following contacts:
Name Position Phone Email
I declare, under oath, that the statements contained in this communication are true and reliable, for all legal effects that may apply.
Sincerely,

DIARIO OFICIAL Tuesday, May 19, 2020
[NAME AND SIGNATURE OF THE LEGAL REPRESENTATIVE WITH POWERS TO PERFORM ACTS OF DOMINION]
Annex 2
Payment Communication Format that Institutions must present to the Bank of Mexico Mexico City, on (DAY) of (MONTH) of (YEAR).
Bank of Mexico
Present:
Attention: Operations Management Management
Through this channel, I inform you that on [ DAY ] of [ MONTH ] of [ YEAR ] [_FULL DESIGNATION OF THE CREDIT INSTITUTION, INCLUDING, IF APPLICABLE, THE FINANCIAL GROUP TO WHICH IT BELONGS], will make the advance payment of the financing granted to it by the Bank of Mexico in terms of Circular 18/2020 for:
The Repo Price equivalent to the amount of $ __________________ (amount in letters), pesos, national currency, plus the Repo Premium and, if applicable, corresponding accessories, or A partial payment of the Repo Price equivalent to the amount of $ __________________ (amount in letters), pesos, national currency, plus the Repo Premium and, if applicable, corresponding accessories, thereby authorizing and instructing this Central Institute to make the respective charge in the Single Account that it holds for this institution in terms of the contract. Sincerely, (NAME AND SIGNATURE OF PERSONS PREVIOUSLY REGISTERED AT THE BANK OF MEXICO) TRANSITORY PROVISIONS FIRST. These Rules shall enter into force on the day of their publication in the Official Gazette of the Federation and their validity shall expire on September 30, 2020. SECOND. In the event that, on the expiration date of the validity indicated, repos executed by Institutions with the Bank of Mexico in accordance with these Rules remain in force, these shall remain in force until the date of their settlement, subject to these provisions and the applicable contracts. Mexico City, May 11, 2020.- BANK OF MEXICO: The General Director of Central Banking Operations, Gerardo Israel García López.- Initials.- The General Director of Financial Stability, Fabrizio López Gallo Dey.- Initials.- The General Legal Director, Luis Urrutia Corral.- Initials.- The General Director of Financial System Affairs, José Luis Negrín Muñoz.- Initials. For any queries regarding the content of this Circular, the Bank of Mexico places itself at your disposal through the Directorate of Central Banking Authorizations and Sanctions at phone (55) 5237-2000 extension 3200.