Circular 2/2007 — Amending Circular 115/2002

CIRCULAR 2/2007
Mexico, D.F., August 20, 2007.
TO THE SECURITIES BROKERAGE FIRMS:
SUBJECT: AMENDMENTS TO CIRCULAR 115/2002.
PROCEDURE TO ACT AS MARKET MAKERS FOR GOVERNMENT SECURITIES.

The Bank of Mexico, in its capacity as financial agent of the Federal Government, based on Articles 3, fraction III, 7, fraction I, and 10 of the Bank of Mexico Law; Articles 8, third and fourth paragraphs, 10, and 12 in relation to Article 19, fractions I, II, VI, and IX, which provide the powers of the General Directorate of Central Bank Operations to negotiate and formalize, among others, operations with securities; to carry out necessary acts for the issuance, placement, purchase, sale, and redemption of government securities; to operate mandates or commissions entrusted to the Bank related to the aforementioned powers; and to participate in the issuance of provisions; as well as Article 17, fraction I, which establishes the power of the Central Bank Provisions Directorate to issue provisions, all of the Internal Regulations of the Bank of Mexico published in the Official Gazette of the Federation on September 30, 1994, whose last modification was published in said Gazette on April 26, 2007, and at the request of the Secretariat of Finance and Public Credit, attached hereto is a copy of Office 305.-088/2007 dated July 26, 2007, through which the aforementioned Department modifies paragraphs 2.4 and 4.2.6 of Office 305.-038/2006, as well as adds to the aforementioned Office Annex 2 titled "Quantification of the Cost for the Lending of Securities to Market Makers by the Bank of Mexico." The foregoing, so that these securities brokerage firms may be aware of it.

Therefore, from this date, the aforementioned Office 305.-088/2007 is incorporated into Appendix 1 of Annex 5 of Circular 115/2002.

Sincerely,
BANK OF MEXICO

SECRETARIAT OF FINANCE AND PUBLIC CREDIT
UNDERSECRETARIAT OF PUBLIC CREDIT AND LOANS
Office No. 305.-088/2007
Mexico, D.F., July 26, 2007.
Mr. David Aarón Margolín Schabes
General Director of Central Bank Operations
Bank of Mexico
Present.

The Secretariat of Finance and Public Credit, based on Articles 31, fractions V and VI of the Organic Law of the Federal Public Administration; Article 4, fraction V of the General Public Debt Law; Article 17, fractions VIII, XI, and XIX of its Internal Regulations; in the Agreement that authorizes the Head of the Public Credit Unit to exercise the powers indicated, issued by the Head of this Department published in the Official Gazette on February 26, 2007; as well as Articles 3, fraction III; 7, fraction I; 8, and 10 of the Bank of Mexico Law, and considering that:

It is convenient to promote the activity of each Market Maker in the forward repo and securities lending markets, adjusting the determination of the premium for securities lending operations conducted in their capacity as Market Makers with the Bank of Mexico based on the activity they have in the aforementioned markets.

Has resolved to modify paragraph 2.4 of Office 305.-038/2006, dated February 27, 2006, to read as follows:

2.4 The measurement of the IAA (Average Activity Index) of Applicants shall be carried out monthly starting on the 16th day of each month and concluding on the 15th day of the following month. In the event that any of the mentioned days is an invalid day for intermediaries, the next valid day shall be taken into account for the start day and the previous valid day for the end day of the period. For the calculation of the IAA, information corresponding to measurement periods of the last six months shall be included. The IAA measurement shall be carried out for all Applicants who have submitted the application referred to in paragraph 2.1, at least ten Valid Days before the last day of the corresponding measurement period.

Likewise, it has resolved to modify paragraph 4.2.6 of Office 305.-038/2006, as follows:

4.2.6 Market Makers shall pay the Bank of Mexico a premium for each securities lending operation they conduct. The amount of said premium shall be obtained by multiplying the weighted government funding rate, which the Bank of Mexico calculates and publishes daily through its website www.banxico.org.mx or through any other electronic, computing, or telecommunications medium authorized for this purpose by said Bank, by a factor that shall be determined in accordance with what is specified in Annex 2 of this Office.

The Bank of Mexico, in its capacity as financial agent of the Federal Government, shall be responsible for calculating this factor monthly starting on the 16th day of each month and concluding on the 15th day of the following month, to be applied from the first Valid Day of the next calendar month. In the event that any of the mentioned days is an invalid day for intermediaries, the next valid day shall be taken into account for the start day and the previous valid day for the end day of the period. For these purposes, Applicants and Market Makers shall send the Bank of Mexico, in the terms it determines, the necessary information to measure the operational capacity of each of them in the repo and securities lending markets. Likewise, the Bank of Mexico shall inform each Market Maker monthly of the factor that will be applied to the weighted government funding rate during the following month to calculate the corresponding premium, at least four Valid Days before the close of each month through some electronic medium authorized for this purpose by said Bank.

Intermediaries who join the list of Market Makers, published by the Secretariat in accordance with paragraph 5.2, shall not be subject to the factor determined in Annex 2 during the two calendar months following the date of their incorporation as Market Makers. In this case, the premium shall be determined by multiplying the weighted government funding rate, which the Bank of Mexico calculates and publishes daily through its website www.banxico.org.mx or through any other electronic, computing, or telecommunications medium authorized for this purpose by said Bank, by a factor of 5%.

TRANSITIONAL PROVISIONS

FIRST.- The modification to paragraph 2.4 shall enter into force on the Valid Day following the date on which the Bank of Mexico notifies this office to the intermediaries.

For its part, the modification to paragraph 4.2.6 shall enter into force as of October 1, 2007.

SECOND.- The factor to be applied to determine the premium for securities lending operations during the month of October 2007 shall be calculated considering the period from August 16 to September 15, 2007. The Bank of Mexico shall notify said factor to each Market Maker no later than September 25, 2007.

THIRD.- Except for the modifications contained in this office, the other provisions of Office 305.-038/2006 shall remain in their terms.

Finally, we instruct the Bank of Mexico to, in its capacity as financial agent of the Federal Government, carry out the acts necessary to implement what is provided in this office, notifying Financial Intermediaries of the provisions therein.

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

EFFECTIVE VOTE. NO RE-ELECTION.
The Head of the Unit
Gerardo Rodríguez Regordosa

ccp Dr. Alejandro Werner Wainfield.- Undersecretary of Finance and Public Credit.- Present.
Act. Alicia C. Núñez de la Huerta.- Deputy General Director of Capture.- Present.

SECRETARIAT OF FINANCE AND PUBLIC CREDIT
UNDERSECRETARIAT OF PUBLIC CREDIT AND LOANS
Office No. 305.-088/2007

Annex 2
Quantification of the Cost for the Lending of Securities to Market Makers by the Bank of Mexico.

The premium that each Market Maker j will pay to the Bank of Mexico for each securities lending operation they conduct, shall be determined by a factor αj that will be applied to the weighted government funding rate i that the Bank of Mexico calculates and publishes daily through its website www.banxico.org.mx or through any other electronic, computing, or telecommunications medium authorized for this purpose by said Bank. Then the premium Cj for each participant j will be:

Cj = i * αj (1)

This premium may be reduced based on the operational capacity in the repo and securities lending markets of each Market Maker. For this purpose, the activity in these markets shall be calculated taking into account a monthly measurement period (in accordance with what is established in paragraph 4.2.6 of this Office) and according to the term and counterparty of the operations. In the event that operations are carried out with entities belonging to the same financial group, they shall not be considered as part of the operation for the calculation of the factor. In the Repo Market, the amount of operations negotiated each day shall be used, while for the computation of activity in the securities lending market, the measurement shall be based on the amount of outstanding operations. Only operations with repos and securities lending that are carried out with CETES and Bonds shall be considered.

The factor αj* that each Market Maker j will pay on the government funding rate shall be obtained according to the following formula:

αj* = a - [ 2/ω { 1 - 2^(-λi/Ri) } ] - [ 2/ω { 1 - 2^(-λi/Pi) } ] (2)

where:

αj* = factor on the government funding rate to determine the premium for loans for Market Maker j. a = maximum factor on the government funding rate for counter service, a ≥ 0.05. Initially this factor will be equal to 0.07.
ω = discount factor, ω ∈ [0, a]. Initially this discount factor will be equal to 0.04.
Rj = daily average balance during the measurement period of the forward repo operation of Market Maker j.
Pj = daily average balance during the measurement period of securities loans of Market Maker j.
λj = 10 / Vj.
Vj = daily average balance during the measurement period of the securities lending counter service exercised by Market Maker j.

Repo operations shall be divided into two segments, according to the nature of the counterparty: interbank (B) and rest (C). In this way, repo operations shall be quantified as follows:

Rj = (1/N) Σ (from t=1 to N) Σ (from N=B,C) βs (0.25R1stj + 0.5R2stj + R3stj) (3)

where,

βs = weight for each segment s, βs ∈ [0.1]. Initially, βB = βC = 1.
R1stj = amount of repos negotiated on day t for segment s with a term of 11 to 20 days by Market Maker j.
R2stj = amount of repos negotiated on day t for segment s with a term of 21 to 30 days by Market Maker j.
R3stj = amount of repos negotiated on day t for segment s with a term greater than 30 days by Market Maker j.
N = number of banking valid days t of the measurement month.
S = segment: interbank (B) and rest (C).

For its part, activity in the securities lending market shall be measured according to:

Pj = (1/N) Σ (from l=1 to N) Ptj (4)

where:

Ptj = amount of outstanding loans on day t of the measurement period by Market Maker j.
N = number of banking valid days t of the measurement month.

The Secretariat may modify the value of parameters a, β, and ω previously defined.