Circular 2/2012 — Modifies Circular 5/2011

Wednesday, February 15, 2012 OFFICIAL GAZETTE (First Section) BANCO DE MEXICO CIRCULAR 2/2012, addressed to credit institutions and brokerage houses, regarding modifications to the procedure for acting as market makers for government securities. A logo is placed at the margin, which says: Bank of Mexico. CIRCULAR 2/2012 TO CREDIT INSTITUTIONS AND BROKERAGE HOUSES: SUBJECT: MODIFICATIONS TO THE PROCEDURE FOR ACTING AS MARKET MAKERS FOR GOVERNMENT SECURITIES The Bank of Mexico, in its capacity as financial agent of the Federal Government, in order to comply with the instruction of the Ministry of Finance and Public Credit to make known to these entities various modifications to the procedure for acting as market makers for government securities, in order to promote transparency in the measurement of their activity, attaches to this copy of Office No. 305.-023/2012, issued by said Ministry, which will enter into force on February 16, 2012. The foregoing, based on what is provided in articles 28 of the Political Constitution of the United Mexican States, sixth and seventh paragraphs; 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, fourth and seventh paragraphs, 10th, first paragraph, 14 Bis, first paragraph in relation to 17, fraction I and 12, first paragraph in relation to 19, 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 General Directorate of Central Bank Operations, respectively, as well as Second of the Agreement on the Affiliation of the Administrative Units of the Bank of Mexico, fractions VII and XI. Mexico, D.F., February 13, 2012.- BANCO DE MEXICO: The General Legal Director, Héctor Reynaldo Tinoco Jaramillo.- Rubric.- The General Director of Central Bank Operations, Francisco Javier Duclaud González de Castilla.- Rubric. This Circular consists of 1 page and its Annex of 9 pages. For any clarification regarding its transmission, please contact our Systems Operation and Support Office at telephone numbers 5227.8797 or 5227.8798. For any consultation regarding its content, please go to the Manager of Authorizations, Queries and Legal Control,

(First Section) OFFICIAL GAZETTE Wednesday, February 15, 2012 located at Avenida 5 de Mayo number 2, Colonia Centro, Mexico, Federal District, C.P. 06059, or at telephone numbers 5237.2308, 5237.2317 or 5237.2000 Ext. 3200. “A seal is placed at the margin with the National Coat of Arms, which says: United Mexican States.- Ministry of Finance and Public Credit.- Undersecretariat of Finance and Public Credit.- Public Credit Unit.- Office No. 305.-023/2012.” Mexico, D.F., February 9, 2012. Lic. Francisco Javier Duclaud González de Castilla General Director of Central Bank 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; 17, fractions VIII, X and XXI of the Internal Regulations of the Ministry of Finance and Public Credit; Unique, fractions V and VII of the Decree by which the Federal Executive is authorized 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 by which the Ministry of Finance and Public Credit is authorized 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 by which the obligations that may be denominated in Investment Units are established and reforms and adds various provisions of the Fiscal Code of the Federation 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 Fiscal Code of the Federation, and considering that it is convenient to promote sound market practices among Market Makers and UDIBONOS Market Makers. It has resolved to modify Office 305.-027/2011, dated January 27, 2011, modified by Office 305.-105/2011, dated July 26, 2011 and by Office 305.-178/2011, dated November 18, 2011, in its sections 1, 2.2, and 4.3, as well as in its Annex 1, to remain in the following terms: “1. DEFINITIONS ... XVI.- Operation in the MexDer: to the purchase or sale operations of futures contracts with a government security as underlying, celebrated in the Mexican Derivatives Market. XVII.- Primary Market Operations: to the placement of CETES, BONOS and UDIBONOS that is carried out in accordance with the provisions provided in Annex 6 of Circular 2019/95, in Annex 3 of Circular 1/2006 and in section CB.5 of Circular 115/2002, or those that replace them, issued by the Bank of Mexico for multiple banking institutions, development banking institutions and brokerage houses, respectively. XVIII.- Operations with Clients: to the direct operations with CETES, BONOS and UDIBONOS that Financial Intermediaries celebrate with the investing public. XIX.- Operations between Intermediaries: to the direct operations with CETES, BONOS and UDIBONOS that Financial Intermediaries celebrate with each other. XX.- Net Long Position: the result of the sum of the own position plus the titles to be received by direct purchases, repo or loan of securities minus the titles to be delivered by direct sales, repo or loan of securities defined for each issuance of BONOS and UDIBONOS in particular.

Wednesday, February 15, 2012 OFFICIAL GAZETTE (First Section) XXI.- Proportional Net Long Position: Percentage of the Balance Placed by Primary Operations that the Net Long Position of a Market Maker represents of any issuance of BONOS or UDIBONOS. XXII.- Balance Placed by Primary Operations: the nominal value amount of the total titles that have been placed through Auctions, swaps, or any operation other than the loan of securities to Market Makers, minus those that have been withdrawn from circulation by any transaction that results in their early maturity such as repurchase and swap. XXIII.- Ministry: to the Ministry of Finance and Public Credit. XXIV.- Trading Systems with Clients: to the mechanisms tending to facilitate operations with securities of Financial Intermediaries with the investing public. XXV.- Auctions: to the auctions for the placement of CETES, BONOS and UDIBONOS, as appropriate, that are 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. XXVI.- UCP: to the Public Credit Unit of the Ministry. XXVII.- UDIBONOS: to the Federal Government Development Bonds denominated in Investment Units.” 2. FINANCIAL INTERMEDIARIES THAT MAY ACT AS MARKET MAKERS. “2.2 The Bank of Mexico, in its capacity as financial agent of the Federal Government, will calculate the IA of the Market Makers and Applicants, in accordance with what is provided in Annex 1 of this Office, as well as the incentives or penalties for diversification and for the Operation in the MexDer to which said Annex refers. For such purposes, Applicants and Market Makers must send to said Bank of Mexico, in the terms that said Central Institute determines, the necessary information to calculate their respective IAs, as well as the incentives and penalties referred to in this paragraph. Subsequently, the Bank of Mexico will send the results obtained to the Ministry, in the terms that are agreed upon, and it will correspond to said Ministry to calculate the IFM in accordance with what is provided in section 4.3. Finally, the UCP will make the final results known to Market Makers and Applicants individually. 4. RIGHTS OF MARKET MAKERS 4.3 The Ministry reserves the right to give incentives for those activities that it considers beneficial for the development of the market and to penalize those behaviors that hinder its functioning. The Ministry will inform, in advance, the actions and behaviors that will be incentivized or penalized, as well as their entry into force date, through its Internet electronic page. The incentives or penalties for the calculation of the IFM will be in force for the twelve months following their entry into force, with the possibility of being renewed for subsequent periods. Notwithstanding the foregoing, the Ministry reserves the right to modify at any time the methodology to obtain said incentives or penalties that will be applied for the calculation of the IFM.” TRANSITORY PROVISIONS FIRST.- What is provided in this Office will enter into force on February 16, 2012. SECOND.- The valid contracts signed between the Bank of Mexico and Market Makers will retain their validity, so no new contracts will need to be signed on account of what is provided in this Office. Finally, we instruct the Bank of Mexico in its capacity as financial agent of the Federal Government to make known to Financial Intermediaries what is provided in this Office. Without any other particular, I repeat to you the assurances of my most distinguished consideration. EFFECTIVE VOTE. NO REELECTION. The Holder, Lic. Alejandro Díaz de León Carrillo

(First Section) OFFICIAL GAZETTE Wednesday, February 15, 2012 Rubric. c.c.p. Lic. Gerardo Rodríguez Regordosa.- Undersecretary of Finance and Public Credit.- Present. Lic. Juan Pablo Newman Aguilar.- Deputy General Director of Collection.- Present. Annex 1 Calculation of the Market Maker Index The Market Maker Index is the sum of the Activity Index plus the incentives and penalties obtained by Diversification of the Operation, plus the incentives by the Operation in the MexDer (OM), plus other incentives and penalties determined by the Ministry. The calculation methodology of the first three components is described below. I. Activity Index (IA) It corresponds to the market participation in the nominal volume weighted by duration operated directly of CETES and BONOS. The IA for intermediary j is defined by: IAj Market participation of intermediary j in the volume operated directly of CETES and BONOS, in the considered segments, for the period defined in section 2.4 of this Office. To consider the risk of operating issuances of different maturity, the nominal volume is multiplied by the duration1 of the instrument. The Bank of Mexico may exclude from the calculation the operations referred to in section 2.3 of this Office. The IA for the intermediary is obtained as follows: IAj = 0.03 ∙ Cj + 0.97 ∙ Bj Where: Cj Market participation of intermediary j in the total volume operated of CETES. Bj Market participation of intermediary j in the total volume operated of BONOS. Cj = Vj Primario Bj = 0.25 ∙ Vj Primario + 0.4 ∙ Vj Clientes + 0.35 ∙ Vj Brokers Vj Primario Market participation of intermediary j in the total volume operated in the primary market (Primary). Vj Clientes Market participation of intermediary j in the total volume operated with clients other than banks or brokerage houses through any means (Clients). Vj Brokers Market participation of intermediary j in the total volume operated with banks or brokerage houses through Brokerage Houses (Brokers). Where: Vj K Market participation of intermediary j in the volume operated in segment K which can be Primary, Clients or Brokers Vj K = Mj K ∙ d MTj K ∙ d Mj K Nominal amount operated by intermediary j in segment K. For the case of the Primary segment, it represents the nominal amount assigned in the primary auction. MTj K Total nominal amount operated by all intermediaries in segment K. For the case of the Primary segment, it represents the nominal amount assigned in the primary auction. Duration, expressed in years2 of the operated Cete or Bono issuance calculated for the day of settlement of each operation.

1 Macaulay duration will be used. 2 Idem. j d

Wednesday, February 15, 2012 OFFICIAL GAZETTE (First Section) II. Diversification Index (ID). It indicates the average number of BONOS issuances in which each intermediary j diversifies its operation. IDj Diversification index for intermediary j of the direct operation of BONOS through Brokerage Houses (Brokers) during the measurement period defined in section 2.4 of this Office. When an intermediary does not operate BONOS issuances, its diversification index takes the value of zero. The Bank of Mexico may exclude from the calculation the operations referred to in section 2.3 of this Office. The ID is calculated as: IDj = 1 ∑ [( Rj l RTj ) 2 ] l Where: Rj l Proportion of the nominal amount operated by intermediary j in issuance l with respect to the Balance Placed by Primary Operations. Rj l = Mj l S l Mj l Nominal amount operated by intermediary j in issuance l . S l Balance Placed by Primary Operations of issuance l, which was observed on average during the measurement period. The average of the Balance Placed by Primary Operations is calculated based on Business Days on which the issuance was in force. RTj Sum of the Rj l for all issuances l and for each intermediary j. Once the average number of issuances operated by each Market Maker during the measurement period, ID, is obtained, ID is divided by the average number of issuances in force during the measurement period to obtain the percentage it represents with respect to the total. The incentives or penalties corresponding to diversification are obtained according to the following matrix and will be applied to each Market Maker, who has been acting as such for more than six consecutive months: III. Incentives for Operation in MexDer (OM) Range of % of Issuances in Force From Until 80% 100% 260 70% 80% 165 65% 70% 125 60% 65% 90 55% 60% 60 50% 55% 35 40% 50% 0 20% 40% -35 0% 20% -60 Incentive / Penalty (Basis points)

(First Section) OFFICIAL GAZETTE Wednesday, February 15, 2012 They are calculated based on the number of futures contracts with a government security as underlying operated in the MexDer. The OM for the intermediary is defined by: OMj Number of futures contracts with a government security as underlying, bought and sold in the MexDer, arranged through any means, by intermediary j must include the operations arranged between the 16th day of the previous month and the 15th day of the measurement month. In case that any of the mentioned days is a non-business day for Financial Intermediaries, the immediate next Business Day will be taken into account for the start day and the immediate previous Business Day for the end day of the period. The Bank of Mexico may exclude from the calculation the operations referred to in section 2.3 of this Office. The OM for the intermediary is calculated as: OMj = SBj + 0.15 ∙ SCj Where: SBj Total number of futures contracts with BONOS as underlying operated by intermediary j. SCj Total number of futures contracts with CETES as underlying operated by intermediary j. The incentives corresponding to the Operation in the MexDer are obtained according to the following matrix once the number of contracts operated by each intermediary is calculated: IV. Other incentives and penalties According to section 4.3 of this Office, the Ministry reserves the right to incorporate other incentives and penalties to the IA. V. Market Maker Index (IFM). Once the IA is obtained, the incentives or penalties corresponding to the ID, the incentives corresponding to the OM and those that the Ministry determines correspond to Market Makers according to section 4.3 of this Office will be added to it, thus obtaining the IFM IFM = IA + incentives – penalties

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j j 10,000 25 20,000 50 40,000 75 OMj (Number of contracts) Incentive (pb)