Circular 19/2020 — Modifies the Repo Rules

Tuesday, June 2, 2020 OFFICIAL GAZETTE 155 BANCO DE MEXICO CIRCULAR 19/2020 addressed to credit institutions, brokerage houses, investment funds, specialized investment societies for retirement funds, general warehouses, insurance companies, guarantee institutions, regulated multiple-object financial societies that maintain equity links with a credit institution and the National Financial Institution for Agricultural, Rural, Forestry and Fisheries Development, regarding the modifications to the Rules to which credit institutions; brokerage houses; investment societies; specialized investment societies for retirement funds, and the Rural Financial Institution, must be subject in their repo operations.

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

CIRCULAR 19/2020 TO CREDIT INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT FUNDS, SPECIALIZED INVESTMENT SOCIETIES FOR RETIREMENT FUNDS, GENERAL WAREHOUSES, INSURANCE COMPANIES, GUARANTEE INSTITUTIONS, REGULATED MULTIPLE-OBJECT FINANCIAL SOCIETIES THAT MAINTAIN EQUITY LINKS WITH A CREDIT INSTITUTION AND THE NATIONAL FINANCIAL INSTITUTION FOR AGRICULTURAL, RURAL, FORESTRY AND FISHERIES DEVELOPMENT:

SUBJECT: MODIFICATIONS TO THE RULES TO WHICH CREDIT INSTITUTIONS; BROKERAGE HOUSES; INVESTMENT SOCIETIES; SPECIALIZED INVESTMENT SOCIETIES FOR RETIREMENT FUNDS, AND THE RURAL FINANCIAL INSTITUTION, MUST BE SUBJECT IN THEIR REPO OPERATIONS.

The Bank of Mexico, with the purpose of continuing to promote the sound development and stability of the financial system, as well as to foster the proper functioning of payment systems and the protection of the public's interests, has considered it necessary to update and modernize the regulatory framework for repo operations carried out by financial entities, in congruence with the recommendations of the financial authority bodies known as the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS), in order to strengthen the methodology used for the calculation of adjustment factors that seek to guarantee net exposure in repo operations through a procedure tending to avoid procyclicality, and contribute to improving liquidity, security, depth and development of markets, as well as, to include insurance and guarantee institutions, multiple-object financial societies that maintain equity links with a credit institution and general warehouses as entities that can carry out repo operations, and expand the universe of securities, to add, among others, those representative of markets such as deposit certificates issued by general warehouses.

For the above, based on articles 28, paragraphs sixth and seventh, 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, paragraph second, of the Credit Institutions Law, 176 of the Securities Market Law, 15 of the Investment Funds Law, 48, fraction VI, of the Savings Systems for Retirement Law, 11 Bis 2, fraction XI, and 87-D, paragraph fourth, of the General Law of Organizations and Auxiliary Credit Activities, 132 and 157, of the Insurance and Guarantee Institutions Law, 4, paragraph first, 8, paragraphs fourth and eighth, 10, paragraph first, 12, paragraph first, in relation to 19, fraction VI and 19 Bis, fraction V, 12 Bis, paragraph first, in relation to 20 Quáter, fraction IV, 14, paragraph first, in relation to 25, fraction VII, 14 Bis, paragraph first, 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 Bank Operations, the General Directorate of Payment Systems and Market Infrastructures, 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, X and XVII, of the Agreement on the Affiliation of the Administrative Units of the Bank of Mexico, has resolved to modify the title of the Rules, the definitions of, “Authority”, “Savings Protection Bonds (BPAS)”, “BREMS”, “Currencies”, “Entity”, “Foreign Financial Entities”, “Rural Financial Institution”, “Institutional Investors and Qualified Investors”, “Reference Countries”, “Repo”, “Siefores”, “Securities”, “Bank Securities”, “Structured Securities”, “Securities for International Arbitrage Operations”, “UDIS”, “Values”, “Government Values” provided for in numeral 1, as well as numerals 2.1, 2.2, 2.3, 2.4, 3, 3.1, 3.2, 3.3, 4.1, 4.2,

156 OFFICIAL GAZETTE Tuesday, June 2, 2020 Structured Securities”, “Securities for International Arbitrage Operations”, “UDIS”, “Values”, “Government Values” provided for in numeral 1, as well as numerals 2.1, 2.2, 2.3, 2.4, 3, 3.1, 3.2, 3.3, 4.1, 4.2, 4.3, 5.1, 5.2, 6.1, 6.2, 7.1, 8.1, 8.2, 9.1, 9.3, 9.5, 9.6, 10 and 11; add the definitions to numeral 1 of, “Certified General Warehouse”, “Deposit Certificates”, “Banking Business Day”, “Investment Funds”, “Securities Rating Agency”, “Guarantee Institutions”, “Insurance Institutions”, “RUCAM”, “Linked SOFOM E.R.”, as well as, the second and fifth paragraphs of numeral 2.1, second paragraph of numeral 2.1, numerals 2.5, 2.6, 2.7, 3.1 Bis, 3.1 Bis 1, 3.4, 3.5, 3.6, 8.1 Bis, and repeal the definition “Investment Societies” of numeral 1, as well as numerals 7.2, 9.4, 11.2, 11.3 and 11.4 of the “Rules to which credit institutions; brokerage houses; investment societies; specialized investment societies for retirement funds, and the Rural Financial Institution, must be subject in their repo operations”, issued by the Bank of Mexico on January 12, 2007, as modified by virtue of subsequent resolutions, to remain in the following terms:

“RULES TO WHICH CREDIT INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT FUNDS, SPECIALIZED INVESTMENT SOCIETIES FOR RETIREMENT FUNDS, GENERAL WAREHOUSES, INSURANCE INSTITUTIONS, GUARANTEE INSTITUTIONS, REGULATED MULTIPLE-OBJECT FINANCIAL SOCIETIES THAT MAINTAIN EQUITY LINKS WITH A CREDIT INSTITUTION AND THE NATIONAL FINANCIAL INSTITUTION FOR AGRICULTURAL, RURAL, FORESTRY AND FISHERIES DEVELOPMENT, MUST BE SUBJECT IN THEIR REPO OPERATIONS”

1. DEFINITIONS “For the purposes of these Rules, singular or plural, shall be understood as follows: Certified General Warehouse: that entity authorized to be constituted and operate with such character in accordance with the General Law of Organizations and Auxiliary Credit Activities, classified in Level IV in terms of said Law, that has the current operational certification opinion issued by the Trusts Established in Relation to Agriculture (FIRA). Authorities: the Bank of Mexico, the National Banking and Securities Commission, the National Commission for the Savings System for Retirement, the National Commission for Insurance and Guarantees and the Ministry of Finance and Public Credit. Savings Protection Bonds: those values issued by the Institute for the Protection of Bank Savings in terms of the Federal Revenue Law for the corresponding fiscal year, with respect to which the Bank of Mexico acts as financial agent for their issuance, placement, purchase and sale in the national market, registered in the National Register of Values referred to in the Securities Market Law. BREMS: Monetary Regulation Bonds issued by the Bank of Mexico, registered in the National Register of Values referred to in the Securities Market Law. … Deposit Certificates: those negotiable instruments, registered in the RUCAM, issued by general warehouses classified in Levels III and IV, in terms of the General Law of Organizations and Auxiliary Credit Activities, that have the current operational certification opinion issued by the Trusts Established in Relation to Agriculture (FIRA). … Banking Business Day: the calendar day other than that on which Credit Institutions must close their doors and suspend operations, in terms of the general provisions, for such effect, issued by the National Banking and Securities Commission. Currencies: United States dollars, as well as any other foreign currency that is freely transferable and immediately convertible to the cited currency. Entities: Credit Institutions, Brokerage Houses, Investment Funds, Siefores, Linked SOFOMES E.R., Insurance Institutions, Guarantee Institutions and the FND. Foreign Financial Entities: those authorized to act as financial entities by the competent authorities of the countries in which they are constituted. FND: The National Financial Institution for Agricultural, Rural, Forestry and Fisheries Development, a decentralized organism of the Federal Public Administration, subject to its own Organic Law. Investment Funds: legal persons authorized to organize and function as such in terms of the Investment Funds Law. Securities Rating Agency: 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 subsidiaries abroad that grant credit ratings to the securities subject to repo in accordance with these Rules.

Tuesday, June 2, 2020 OFFICIAL GAZETTE 157 Securities Market Law, as well as their subsidiaries abroad that grant credit ratings to the securities subject to repo in accordance with these Rules. … Guarantee Institutions: legal persons authorized to organize and function as such in terms of the Insurance and Guarantee Institutions Law. Insurance Institutions: legal persons authorized to organize and function as such in terms of the Insurance and Guarantee Institutions Law. Institutional Investors and Qualified Investors: persons who have such character in terms of what is provided in the Securities Market Law, other than Investment Funds and Siefores. Reference Countries: those corresponding to the authorities that are ordinary members of the Technical Committee of the International Organization of Securities Commissions, as well as those that are part of the European Union. Repo: the operation referred to in Title Two, Chapter I, of the General Law of Negotiable Instruments and Credit Operations. RUCAM: The Unique Register of Certificates, Warehouses and Merchandise, provided for in article 22 Bis 6 of the General Law of Organizations and Auxiliary Credit Activities. Siefores: specialized investment societies for retirement funds authorized to organize and function as such in terms of the Savings Systems for Retirement Law. Investment Societies: Repealed. Linked SOFOM E.R.: the regulated multiple-object financial society that maintains an equity link with some multiple banking institution in accordance with the General Law of Organizations and Auxiliary Credit Activities, and that has the current registration before the National Commission for the Protection and Defense of Users of Financial Services, in terms of article 87-B of said Law. Security: any debt value with a secondary market, that: a) is registered in the National Register of Values referred to in the Securities Market Law, or, when issued abroad, is registered, authorized or regulated, for sale to the general public, by the securities commissions or equivalent bodies of the Reference Countries; b) is not included in any of the other definitions of these Rules, and c) does not correspond to i) a subordinate obligation; ii) another debt security subordinate to the payment of obligations with higher priority, or iii) any Structured Security. Bank Securities: debt values with a secondary market registered in the National Register of Values provided for in the Securities Market Law issued, accepted, guaranteed or guaranteed by Credit Institutions, except: a) subordinate obligations; b) other debt securities subordinate to the payment of obligations with higher priority, and c) Structured Securities. Structured Securities: securities, other than Government Values, whose yield is determined based on the variations observed in the prices of financial assets or of derivative operations on financial assets, including structured bank securities provided for in Title Two, Chapter I, Sections I, Section G, and III, Section E, of the “Provisions applicable to the operations of credit institutions, regulated multiple-object financial societies that maintain equity links with credit institutions and the National Financial Institution for Agricultural, Rural, Forestry and Fisheries Development” issued by the Bank of Mexico through Circular 3/2012, published in the Official Gazette of the Federation on March 2, 2012, as modified subsequently. Securities for International Arbitrage Operations: securities registered in the National Register of Values provided for in the Securities Market Law that, in accordance with the provisions issued by the National Banking and Securities Commission, are subject to operations known as international arbitrage and that are not included in any of the other definitions of these Rules. UDIS: accounting units, whose value in national currency is published by the Bank of Mexico in the Official Gazette of the Federation, in accordance with articles Third of the “Decree by which obligations may be denominated in investment units and reforms and additions are made to various provisions of the Federal Tax Code and the Income Tax Law” and 20 Ter of the Federal Tax Code. Values: Bank Securities, Government Values, Foreign Values, Savings Protection Bonds, BREMS, Securities for International Arbitrage Operations and Securities. … Government Values: values registered in the National Register of Values provided for in the Securities Market Law, issued or guaranteed by the Federal Government of the United Mexican States, except: the Treasury Certificates of the Federation issued under restructuring programs of

158 OFFICIAL GAZETTE Tuesday, June 2, 2020 credits in investment units (Special Cetes), as well as any other that is not negotiable or does not have a secondary market.”

2. AUTHORIZED OPERATIONS AND COUNTERPARTIES “2.1 Credit Institutions, Linked SOFOMES E.R. and Brokerage Houses may enter into Repos, in their capacity as repo-takers, with any person. The Entities indicated in the previous paragraph may only enter into Repos, in their capacity as repo-takers, on Securities or Foreign Values, with other financial entities of the same financial group to which they belong, with Qualified Investors or with natural persons, provided that said Securities or Foreign Values, as applicable to their term, have assigned, by at least two Securities Rating Institutions, a rating that corresponds to any of the risk grades 1, 2, 3 or 4 specified by the National Banking and Securities Commission in Annex 1-B of the General Provisions Applicable to Credit Institutions, published in the Official Gazette of the Federation on December 2, 2005, in terms of the modifications published subsequently, or those ratings that the Bank of Mexico determines and makes known to the referred Entities. Regarding the Securities referred to in the previous paragraph, in the event that they do not have a local scale credit rating, the rating of the Security in question on the global scale, as applicable, shall be taken, in its case, in accordance with what is indicated in the aforementioned annex 1-B or, in default, the rating corresponding to the issuer of the Security, or that which the Bank of Mexico determines and makes known to the Entities referred to in the first paragraph of this numeral. Additionally, Credit Institutions, Linked SOFOMES E.R. and Brokerage Houses may only enter into Repos, in their capacity as repo-givers, with the Bank of Mexico, other Credit Institutions, Brokerage Houses, Certified General Warehouses or Foreign Financial Entities. Credit Institutions may enter into Repos with Values without the intermediation of Brokerage Houses. Repos with Foreign Values that are not registered in the National Register of Values provided for in the Securities Market Law, in addition to complying with what is established in these Rules, shall be subject, in terms of intermediation, to the provisions that are applicable.” “2.2 Investment Funds may enter into Repos, in their capacity as repo-givers, only with Credit Institutions, Foreign Financial Entities or Brokerage Houses. In addition to what is provided in the previous paragraph, each Investment Fund may enter into Repos, in its capacity as repo-taker, only with one of the counterparties indicated in said paragraph, up to a maximum amount equal to 5% of the value of the assets that the Investment Fund administers, provided that this is contemplated in its information prospectus to public investors authorized by the National Banking and Securities Commission. In this case, the Investment Fund in question must establish in the referred information prospectus the terms and conditions under which it must enter into the Repos referred to in this paragraph. Additionally, open Investment Funds referred to in the Investment Funds Law may, exceptionally, enter into Repos, in their capacity as repo-takers, only with one of the counterparties indicated in the first paragraph of this numeral, up to a maximum amount equal to 10% of the value of the respective assets that they administer, only in the event that it is necessary to comply with their share repurchase policies when disordered conditions arise in financial markets, in the terms established to that effect in their referred information prospectuses.” “2.3 Siefores may only enter into Repos, in their capacity as repo-givers and with Credit Institutions, Brokerage Houses, Linked SOFOMES E.R. or Foreign Financial Entities, that meet the requirements that, for such effect, the National Commission for the Savings System for Retirement determines through general provisions.” “2.4 The FND may only enter into Repos, in its capacity as repo-giver and, in this case, the counterparties may only be the Bank of Mexico, Credit Institutions, Brokerage Houses, Certified General Warehouses or Foreign Financial Entities.” “2.5 Certified General Warehouses may enter into Repos, in their capacity as repo-givers, with any of their clients. Additionally, said entities may enter into Repos, in their capacity as repo-takers, only with Credit Institutions, Linked SOFOMES E.R., Brokerage Houses, the FND, or Foreign Financial Entities.” “2.6 Insurance Institutions and Guarantee Institutions may only enter into Repos, in their capacity as repo-givers, with Credit Institutions and Brokerage Houses.”

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“2.7 In the event that any of the Entities subject to these Rules are authorized, in accordance with the regulations issued for this purpose, to enter into Repos with a character different from that established in these Rules, they may carry out such operations under the terms and conditions established for this purpose in the applicable regulations.”

“3. CREDIT INSTRUMENTS SUBJECT TO REPO”

“3.1 Credit Institutions, SOFOMES E.R. Vinculadas, and the FND may enter into Repos on their own account with Securities owned by them, except for Securities for International Arbitrage Operations. Similarly, Credit Institutions and Brokerage Houses may enter into Repos on behalf of third parties with said Securities, provided that the respective client grants them a mandate or commission to carry out such operations on their behalf, in the capacity of repo party, reverse repo party, or both, identifying the type of Securities subject to the operation, as well as those that could be subject to collateral, the maximum term thereof, and, where applicable, the other general characteristics of said operations.”

“3.1 Bis Additionally to what is established in the preceding paragraph 3.1, the Entities indicated in said paragraph may only enter into Repos on Certificates of Deposit provided that such credit instruments evidence some of the goods or credits on goods indicated as underlying that can be subject to derivative operations, in accordance with the provisions of the “Rules for the Conduct of Derivative Operations”, issued by the Bank of Mexico through Circular 4/2012, published in the Official Journal of the Federation on March 2, 2012, under the current terms applicable or modifications made subsequently.

The Bank of Mexico may authorize the conduct of Repo operations on Certificates of Deposit that evidence a good or a credit on a good, different from those indicated in the preceding paragraph, for which it will take into account that such goods have an observable and transparent price, a significant number of observations, and that their price history maintains a significant correlation with some of the goods indicated in said paragraph.”

“3.1 Bis 1 Credit Institutions, SOFOMES E.R. Vinculadas, Certified General Warehouses, and the FND, in the event that they enter into Repos, in their capacity as reverse repo parties, with Certificates of Deposit, must maintain, under their ownership, said credit instruments until the maturity of the respective Repo, and therefore may not transfer their ownership during the validity of the Repo.”

“3.2 Brokerage Houses may enter into Repos with Securities.”

“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.”

“3.4 Each Certified General Warehouse may only enter into Repos, in terms of what is provided in paragraphs 2.5 and 3.1 Bis, with the Certificates of Deposit issued by the same Certified General Warehouse.”

“3.5 Surety Institutions and Insurance Institutions may enter into Repos, in terms of what is provided in paragraph 2.6, with any Security.”

“3.6 In Repos on Securities entered into by the Entities, those of the same species that the reverse repo party undertakes to transfer to the repo party within the agreed term, must have the same “issuance key” assigned in the corresponding market.”

4. TERMS

“4.1 Entities and Certified General Warehouses may freely agree on the term of the Repos they enter into, except as provided in paragraphs 4.2 and 4.3.”

“4.2 The term of the Repos entered into by Entities and Certified General Warehouses, including their extensions, must mature no later than the Banking Business Day preceding the maturity date of the Securities or Certificates of Deposit subject to the respective Repo.”

“4.3 In the case of Repos entered into with Securities for International Arbitrage Operations, the term of said Repos may not exceed four Banking Business Days.”

5. SETTLEMENT OF OPERATIONS

“5.1 The transfer of the Securities or Certificates of Deposit, as well as the funds subject to a Repo, must be effected on the same value date, which may not be later than the fourth immediate Banking Business Day following the date on which the Repo was agreed.

Upon maturity of the Repo, the transfer of the Securities or Certificates of Deposit, as well as the corresponding funds, must be effected on the same day of maturity.”

“5.2 Entities and Certified General Warehouses may carry out the early settlement of the Repos they enter into, under the terms stipulated in the master contracts under which the corresponding operations are executed.”

6. PRICE AND PREMIUM

“6.1 Entities and Certified General Warehouses may establish in the Repos they enter into the denomination of the price and premium in national currency, Foreign Exchange, or in UDIS, independent of the denomination of the Securities or Certificates of Deposit subject to the Repo.

In the event that Credit Institutions, SOFOMES E.R. Vinculadas, Brokerage Houses, or Certified General Warehouses enter into a Repo with a counterparty other than an Entity or a Certified General Warehouse, in which the price and premium are denominated in a currency different from that of the Securities or Certificates of Deposit subject to the Repo, they must obtain and preserve an express and written declaration from said counterparty, by which it explicitly acknowledges the difference in currencies referred to.”

“6.2 Entities and Certified General Warehouses must agree, in the Repos they enter into, that the periods to be applied in the execution of said operations must be determined based on years of three hundred sixty days and the number of days effectively elapsed.”

7. INTERESTS ON SECURITIES

“7.1 The Repos entered into by Entities must provide for the obligation of the reverse repo party to deliver to the repo party the amount of interests or yields paid by the respective issuers of the Securities subject to said Repos, on the same Banking Business Day that they receive them, unless the parties stipulate otherwise.”

“7.2 Repealed.”

8. INSTRUMENTATION AND CONFIRMATION

“8.1 Repos that Entities enter into with other Entities or Institutional Investors must be carried out considering the market price of the Securities or Certificates of Deposit subject to the Repo, or others granted as collateral for said operations, less the adjustment factors determined in accordance with the methodology and guidelines described in this paragraph. Likewise, they must be carried out under the unique master contract that, for such operations, are jointly approved by the Mexican Bank Association, A.C., and the Mexican Securities and Futures Association, A.C.

The aforementioned master contract must contain, insofar as it does not contravene applicable national provisions, the guidelines and directives established in the contract models approved for this type of operations by the association constituted in Switzerland, called “International Capital Market Association” (ICMA) or the association constituted in the United States of America, called “Securities Industry and Financial Markets Association” (SIFMA).

Repos that Entities and Certified General Warehouses enter into for terms greater than three Banking Business Days counted from the date of agreement, including their extensions, must establish the obligation to constitute collateral that covers 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 in accordance with the corresponding master contract. The exposure will be calculated as the differential between the agreed price of the Repo at the time of its celebration, plus the accrued premium agreed to the date of calculation, and the market value of the Securities or Certificates of Deposit subject to the Repo, the latter incorporating the adjustment factor determined in accordance with the procedure and guidelines described in this paragraph.

The collateral, determined in accordance with what is stated in the preceding paragraph, which the parties must provide, if applicable, may be constituted through pledge, stock pledge, guarantee trust, or administration and payment trust, or pledge on bank deposit of money. Insurance Institutions and Surety Institutions that enter into the Repos referred to in this paragraph may only guarantee their obligations under the foregoing through administration and payment trusts.

Entities, for the determination of the adjustment factors referred to in the third paragraph of this paragraph, must consider those resulting from the application of the methodology that, for such purposes, the Mexican Bank Association, A.C., and the Mexican Securities and Futures Association, A.C., agree upon, complying with the minimum guidelines described in subsections i) to iv) of this paragraph. The aforementioned methodology, along with the updated adjustment factors, must be approved by the Bank of Mexico annually. For such purposes, the aforementioned associations must send to the Central Banking Authorizations and Inquiries Department of the Bank of Mexico the documentation indicated, with at least thirty Banking Business Days in advance of the date on which they intend to begin using the aforementioned methodology and table of adjustment factors. After the passage of said term without any requirement from the Bank of Mexico, the methodology and the table of adjustment factors will be understood as authorized.

Certified General Warehouses, for the determination of the adjustment factors referred to in the third paragraph of this paragraph, must consider those resulting from the application of the methodology that, for such purposes, the Mexican Bank Association, A.C., the FND, the Trusts Established in Relation to Agriculture (FIRA), and the Association of Certified General Warehouses, A.C., agree upon, complying with the minimum guidelines described in subsections i) to iv) of this paragraph. The aforementioned methodology and the table with the updated adjustment factors must be approved by the Bank of Mexico annually, in accordance with the procedure described in the preceding paragraph.

Likewise, the methodologies referred to in this paragraph must consider rules and procedures for obtaining information, taking into account, among other things, the availability of reliable data, to discard errors in the information and identify missing values. Additionally, they must consider the realization, at least every twelve months, of: a) evaluations on their reasonableness to, if applicable and subject to the authorization of the Bank of Mexico, add, eliminate, or adjust those components and assumptions relevant to improve their robustness and effectiveness; as well as, b) adjustment tests using historical information (backtesting), employing the historical information of the operations carried out and the appraisals applied.

Entities and Certified General Warehouses must document the results of the tests referred to in this paragraph.

Notwithstanding the foregoing, the Bank of Mexico may determine the adjustment factors that must be applied in the calculation of Repos on Securities or Certificates of Deposit referred to in this paragraph, in substitution for or in the absence of those agreed by the respective associations previously mentioned.

Entities and Certified General Warehouses, for the determination of the aforementioned adjustment factors, must for each Security or Certificate of Deposit subject to the Repo consider, at least, the following elements:

i. A historical period of five years. The period mentioned in this subsection, must be composed of: (a) a fixed period that considers events that occurred during the 12-month period between August 2008 and July 2009, as well as the 12-month period between January and December 2013, and (b) a mobile period that considers the events of the last three calendar years prior to the determination of the adjustment factor. In the specific case of Certificates of Deposit, a different stress fixed period than that indicated in the preceding subsection (a) may be used, only when it is demonstrated in the methodology submitted for authorization by the Bank of Mexico that, for the particular case of the good in question, the referred period is not relevant as one of volatility by virtue of having another that evidences greater instability;

ii. Use a measure of expected loss, conditioned to the fact that it is greater than or equal to the ninety-seven point fifth percentile of the corresponding distribution of losses and gains by value fluctuations also known as conditional value at risk;

iii. Consider the credit risk of the respective Securities or Certificates of Deposit taking into account the potential losses that these could generate by credit degradation. In the case of Certificates of Deposit, the adjustment factor resulting from applying the methodology contained in Annex 14-C of the General Provisions applicable to certified general warehouses, exchange houses, credit unions, and multiple-object financial societies regulated, issued by the National Banking and Securities Commission, may be used;

iv. Incorporate, if applicable, an additional charge to the adjustment factor that considers the case in which there is a significant positive correlation between the credit risk of the credit instruments subject to Repo and the credit risk of the counterparty.

In addition to the preceding subsections, the methodology may incorporate other additional adjustment factors considering the nature of the respective Security or Certificate of Deposit such as, among others: a) a charge when there is a currency mismatch between the Securities or Certificates of Deposit and the price and premium of the Repo; b) additional charges to the adjustment factor based on the difficulty to determine and observe the market prices of the Securities or Certificates of Deposit involved in Repo operations when they do not comply with what is stated in subsection i) of this paragraph or do not have history; c) the feasibility of placement of the inventory of goods backed by Certificates of Deposit; d) the difficulty or cost of storage of the goods backed by Certificates of Deposit, and e) any other expense that might be incurred due to any default of the Repo that could affect the reverse repo party.

Once Entities and Certified General Warehouses determine the adjustment factor to implement, in accordance with what is provided in subsections i) to iv) above, in the Repo operations to be agreed, the counterparties must constitute daily additional collateral that results as appropriate, so as to mitigate the exposure that exceeds the maximum amount agreed by the parties that assumes the reverse repo party or the repo party in accordance with the corresponding contract.

Repos that Entities and Certified General Warehouses enter into with Foreign Financial Entities may be instrumented, in terms of the regulation applicable to them, under the master contract referred to in the first paragraph of this paragraph or under contracts approved for this purpose by any of the associations indicated in the second paragraph of this paragraph 8.1 or in the first paragraph of paragraph 8.1 Bis.

Repos that Entities and Certified General Warehouses enter into with counterparties other than those indicated in the first and twelfth paragraphs of this paragraph must be carried out under the master contracts they agree upon with them.

For the purposes of the contracts mentioned in the first, eleventh, and twelfth paragraphs of this paragraph, Entities and Certified General Warehouses, subject to what their regulating laws provide, may give as collateral titles or securities from their portfolio, credit rights in their favor, or cash, as applicable.

In all cases, the parties must enter into the aforementioned master contracts in writing, prior to the agreement of any Repo operation.

The agreement of the Repos and, if applicable, the different acts that are carried out by virtue of these must be carried out through any of the forms that the master contracts establish.

Entities and Certified General Warehouses will be responsible for ensuring that the Repos they enter into, including the corresponding contracts, strictly comply with these Rules, as well as with the other provisions applicable to them.”

“8.1 Bis Repos that Certified General Warehouses enter into with Credit Institutions, Brokerage Houses, Insurance Institutions, Surety Institutions, SOFOMES E.R. Vinculadas, and the FND must be carried out considering the market price of the Certificates of Deposit, less the adjustment factors determined in accordance with the methodology and guidelines described in the preceding paragraph. Likewise, they must be carried out under the unique master contract that, for this type of operations, are jointly approved by the FND, the Association of Certified General Warehouses, A.C., the Mexican Bank Association, A.C., the Mexican Securities and Futures Association, A.C., and the Trusts Established in Relation to Agriculture (FIRA). The aforementioned master contract must contain, insofar as it does not contravene applicable national provisions, the guidelines and directives established for this type of operations by the associations referred to in the second paragraph of paragraph 8.1.”

“8.2 In the case of Repos between Entities or Certified General Warehouses, with Foreign Financial Entities or with Institutional Investors, these must confirm each other on the same day of their agreement 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.

When Repos are entered into with persons other than those indicated in the preceding paragraph, Entities and Certified General Warehouses must issue, on the same day of their agreement, a receipt through any means that leaves documentary evidence, even in electronic media, of the conduct of the corresponding Repo, which they must keep available for the client or send to them in case they request it.

In the aforementioned confirmation or in the respective receipt, the repo party, the reverse repo party, the price, premium, and term of the Repo must be indicated, as well as, as applicable, the specific characteristics of the Securities or Certificates of Deposit subject to it, such as: issuer; issuance key; nominal value; type of Security or Certificate of Deposit; characteristics of the goods covered by the Certificate of Deposit and, if applicable, guarantor, acceptor, or guarantor of the Securities or Certificate of Deposit.

When the parties to the Repo agree on its early settlement, and the terms and conditions under which it will be carried out have not been established in the respective master contract, they must agree on said terms and conditions at the time of agreeing on such settlement. The agreement must be carried out through”

Tuesday, June 2, 2020 OFFICIAL GAZETTE 163

any of the forms provided for in the master contract for the celebration of Reportos and the corresponding confirmation or receipt must be issued in accordance with what this section stipulates.

In any case, the Entities and the Certified General Warehouses of Deposit must carry out the records that correspond to the different acts carried out by virtue of the Reportos they celebrate, on the same day that such acts are arranged.”

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9. PROHIBITIONS

“9.1 The Entities may not act as reportees or reporters on their own account for Securities that the Entities themselves or the persons related to such Entities issue, accept, endorse, or guarantee. For the purposes of what is provided in this section, related persons shall be understood as provided in article 73 of the Credit Institutions Law.”

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“9.3 The Entities and the Certified General Warehouses of Deposit must abstain from celebrating Reportos under conditions and terms contrary to their policies and to the sound practices of the market.”

“9.4 Repealed.”

“9.5 Brokerage Houses are prohibited from carrying out Reportos on Securities for International Arbitrage Operations, when such operations are not related to an operation known as international arbitrage and regulated by the National Banking and Securities Commission.”

“9.6 The Entities and the Certified General Warehouses of Deposit may not celebrate Reportos on terms different from those provided for in these Rules. The foregoing must be observed without prejudice to the fact that, in exceptional cases, the Bank of Mexico, through the Central Banking Authorizations and Inquiries Management, authorizes the celebration of Reportos with other characteristics or on credit instruments other than those mentioned in this Circular.”

“10. INFORMATION

The Entities and the Certified General Warehouses of Deposit must provide the Authorities, in terms of the applicable provisions, information on the Reportos they celebrate, in the form and deadlines that they require.

The Entities must send to the corresponding Securities Depository, on the same day of their arrangement and in the terms indicated by it, the information relating to the Reportos they celebrate with other Entities and with the Bank of Mexico, which are settled through said Securities Depository.”

“11. SUPERVISION AND SANCTION

11.1 The Bank of Mexico will supervise compliance by the Entities and Certified General Warehouses of Deposit with the provisions of these Rules, and any non-compliance will be sanctioned in terms of what is provided in the Bank of Mexico Law and other applicable regulations.

The Entities and the Certified General Warehouses of Deposit will be sanctioned by the Bank of Mexico when, in contravention of what is provided in section 8.1, they do not use the adjustment factors approved by the Bank of Mexico or do not deliver the corresponding guarantees in accordance with these Rules.”

“11.2 Repealed.”

“11.3 Repealed.”

“11.4 Repealed.”

TRANSITIONAL PROVISIONS

FIRST.- This Circular will enter into force on the next Banking Business Day following its publication in the Official Gazette of the Federation, except for those cases provided for in the following transitional articles.

SECOND.- The Associations referred to in section 8.1, from the entry into force of this Circular and for twelve months thereafter, must submit to the Bank of Mexico, for its approval, the adjustment factors and the methodology referred to in said section.

THIRD.- The Certified General Warehouses of Deposit will have a period of twelve months, counted from the entry into force of this Circular, to: i) have the methodology and adjustment factors in terms of what is provided in section 8.1 of this Circular, and ii) have the single master contract referred to in section 8.1 Bis of this Circular.

164 OFFICIAL GAZETTE Tuesday, June 2, 2020

Mexico City, May 25, 2020.- BANK OF MEXICO: The General Director of Central Banking Operations, Gerardo Israel García López.- Rubric.- The General Director of Payment Systems and Market Infrastructures, Manuel Miguel Ángel Díaz Díaz.- Rubric.- The General Director of Financial Stability, Fabrizio López Gallo Dey.- Rubric.- The General Legal Director, Luis Urrutia Corral.- Rubric.- The General Director of Financial System Affairs, José Luis Negrín Muñoz.- 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 phone (55) 5237-2000 extension 3200.