Circular 2/2023 — Modifications to Circular 4/2012 (Initial and Variation Margins)

Tuesday, March 14, 2023 OFFICIAL GAZETTE 1
BANCO DE MEXICO
CIRCULAR 2/2023 addressed to Credit Institutions, Brokerage Houses, Investment Funds, Multiple-Object Financial Societies regulated that maintain equity links with a Credit Institution, General Warehouses and the National Financial Institution for Agricultural, Rural, Forestry and Fisheries Development, regarding Modifications to Circular 4/2012 (Initial and Variation Margins). At the margin a logo, which says: Bank of Mexico. CIRCULAR 2/2023 TO CREDIT INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT FUNDS, MULTIPLE-OBJECT FINANCIAL SOCIETIES REGULATED THAT MAINTAIN EQUITY LINKS WITH A CREDIT INSTITUTION, GENERAL WAREHOUSES AND THE NATIONAL FINANCIAL INSTITUTION FOR AGRICULTURAL, RURAL, FORESTRY AND FISHERIES DEVELOPMENT:
SUBJECT: MODIFICATIONS TO CIRCULAR
4/2012 (INITIAL AND VARIATION MARGINS)
The Bank of Mexico, with the purpose of continuing to promote the sound development and stability of the financial system, considers it necessary to establish guidelines that allow the determination of bilateral requirements for initial and variation margins for derivative transactions that are not cleared and settled in clearing houses or entities abroad that provide central counterparty services. These guidelines incorporate international best practices in the matter and will allow reducing the counterparty risk of such transactions. Thus, by promoting better management of this risk, they will foster a reduction in the systemic risk of the derivatives market in Mexico, contributing to the sound development of the financial system. For the above, based on articles 28, paragraphs sixth and seventh, of the Political Constitution of the United Mexican States, 24, 26, 27 and 36 of the Bank of Mexico Law, 46, fraction XXV, and 46 Bis 5, fraction II, of the Credit Institutions Law, 176 of the Securities Market Law, 15, paragraph second, of the Investment Funds Law, 22 of the Law for Transparency and Ordering of Financial Services 11 Bis 2, fraction XII, and 87-D, paragraph fourth, of the General Law of Auxiliary Credit Organizations and Activities, 9 of the Organic Law of National Financiera, 6 of the Organic Law of Federal Mortgage Society, 9 of the Organic Law of the Bank of Well-being, 9 of the Organic Law of the National Bank of Foreign Trade, 10 of the Organic Law of the National Bank of Public Works and Services, 8 of the Law Organic of the National Bank of the Army, Air Force and Navy, 7, fraction X, and 19 of the Organic Law of the National Financial Institution for Agricultural, Rural, Forestry and Fisheries Development, 4, paragraph first, 8, paragraphs fourth and eighth, 10, paragraph first, 12, paragraph first, in relation to 19 Bis, fraction V, 14, paragraph first, in relation to 25 Bis, fraction VII, 14 Bis, paragraph first, in relation to 17, fraction I, 14 Bis 1, paragraph first, in relation to 25 Bis 1, fraction IV, and 20 Quáter, 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 Directorate Legal, the General Directorate of Affairs of the Financial System and the Directorate of Policy and Studies of Payment Systems and Market Infrastructures, 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 definitions of “Financial Institution” and “Management” in section 1.1, the first paragraph of section 3.1.3, the fourth paragraph of section 4, the seventh paragraph of section 5.1, and the second paragraph of section 7.5, as well as add the definitions of “Set of Cleared Operations”, “Financial Consortium”, “Master Clearing Agreement”,
“Trade Date”, “Affiliated Entities”, “Event of Default”, “Margin”, “Initial Margin”, “Variation Margin”, “Initial Margin Amount”, “Non-Centrally Cleared Over-the-Counter Derivative Transactions” and “Initial Margin Threshold” in section 1.1, sections 6.1, 6.2, 6.2.1, 6.2.2, 6.2.3, 6.2.4, 6.2.5, 6.2.5.1, 6.2.5.2, 6.2.5.3, 6.2.5.4, 6.2.5.5, 6.2.5.6, 6.2.6, 6.2.6.1, 6.2.7, 6.2.8, 6.2.9, 6.2.9.1, 6.2.9.2, 6.2.9.3, 6.2.9.4, 6.2.9.5, 6.2.10, as well as Annexes 4, 5 and 6, of the “Rules for the conduct

2 OFFICIAL GAZETTE Tuesday, March 14, 2023 of derivative operations”, issued by the Bank of Mexico through Circular 4/2012, to remain in the terms as follows:
RULES FOR THE CONDUCT OF DERIVATIVE OPERATIONS

1. GENERAL PROVISIONS
   “1.1. For the purposes of these Rules, the following shall be understood, in singular or plural, as:
   ...
   Set of Cleared
   Operations:
   the set of Non-Centrally Cleared Over-the-Counter Derivative Transactions, concluded between two parties, that are subject to the same Master Clearing Agreement.
   ...
   Financial Consortium: the set of financial entities referred to in these Rules, including Foreign Financial Entities with respect to which the same legal person exercises control, in terms similar to those stated in article 2, fraction III, of the Securities Market Law. Master Clearing Agreement:
   an agreement between two parties of Derivative Transactions, concluded in writing or in electronic format in accordance with the due formality, individually or included in the master contract referred to in
   section 5.1 below, legally enforceable, which stipulates the following:
   a) The creation of a single payment obligation regarding the totality of the obligations derived from all individual Derivative Transactions included in said agreement, in case an Event of Default occurs, after the permitted suspension period in accordance with subparagraph b) below. b) The right of the party that has not committed the Event of Default to rescind or terminate prematurely or close, on the basis of net amounts, all Derivative Transactions included in said agreement, as well as settle or compensate the respective guarantees, without delay, in case an Event of Default occurs. The exercise of said right shall be subject to what is established in
   article 176 of the Credit Institutions Law, when
   any of the parties is a Credit Institution or in the legal provisions of foreign jurisdictions applicable to said agreement, which consider elements analogous to those provided in the cited article, including the suspension or impediment of the exercise of said right, established with the aim of facilitating the orderly liquidation or resolution of the party that commits the Event of Default. c) The agreement in question does not include a clause that allows the party that has not committed an Event of Default to make a payment for an amount less than that which would correspond to it in case the Event of Default did not occur or is released from making the payment respective in its entirety. ... Trade Date: the calendar day on which the corresponding parties conclude a Non-Centrally Cleared Over-the-Counter Derivative Transaction, subject to the following:
   a) If each party, in accordance with the time zone that corresponds to its domicile is on a different calendar day in

Tuesday, March 14, 2023 OFFICIAL GAZETTE 3 the moment both parties conclude the Derivative Transaction referred to, the most recent of the two days shall be considered as the Trade Date. b) If the Non-Centrally Cleared Over-the-Counter Derivative Transaction is concluded after 16:00:00 hours in the place where any of the parties is located or on a day that is not a Business Day, the Trade Date shall be considered the next immediate Business Day. ... Affiliated Entities: those legal persons that fall under any of the following situations:
a) One of them consolidates the other in its financial statements prepared in accordance with Financial Information Standards (NIF), defined by the Mexican Council for Research and Development of Financial Information Standards, A.C. (CINIF); b) Such legal persons consolidate with a third legal person in their financial statements prepared in accordance with the previous subparagraph a); c) In case any of said legal persons is not subject to the standards referred to in subparagraph a) above, the consolidation provided for in that subparagraph, as well as in b), would have occurred if those standards had been applied, and d) The Bank of Mexico, based on the request submitted through Management, determines that one of said persons is affiliated to the other based on information demonstrating that either of them would provide sufficient financial support to the other or is materially subject to the risks or losses of the other. ... Event of Default: the event referred to the non-compliance of any payment obligation in a Set of Cleared Operations, including any insolvency, bankruptcy, payment suspension, liquidation or similar procedure to which the party of the respective Derivative Transaction is subject, as well as by any other objective cause attributable to said party, in accordance with what is stipulated in the Master Clearing Agreement in question. ... FND: the decentralized organism of the Federal Public Administration provided for in the Organic Law of the National Financial Institution for Agricultural, Rural, Forestry and Fisheries Development. ... Management: the Management of Authorizations and Inquiries of Central Banking of the Bank of Mexico. ... Margin: Initial Margin and Variation Margin. Initial Margin: the guarantee that the party in a Non-Centrally Cleared Over-the-Counter Derivative Transaction or in the Set of Cleared Operations must constitute or constitutes in favor of the counterparty, to mitigate the potential future exposure of such transactions, in the event of potential non-compliance with the obligations due by that party. Variation Margin: the guarantee that the party in a Non-Centrally Cleared Over-the-Counter Derivative Transaction or in the Set of Cleared Operations must constitute or constitutes in favor of the counterparty, to cover the obligations due by it under one or more Non-Centrally Cleared Over-the-Counter Derivative Transactions as a result of the change in the value of such obligations with respect to the value that

4 OFFICIAL GAZETTE Tuesday, March 14, 2023 these registered on the most recent day on which the guarantee for this concept was constituted.
...
Initial Margin Amount: that which corresponds in accordance with the following:
a) In case the Entity or Investment Fund in question does not use an authorized initial margin model in accordance with these Rules, the Initial Margin Amount shall be equivalent to that resulting from applying what is provided in section 6.2.5.3 below, or b) In case the Entity or Investment Fund in question uses an authorized initial margin model in accordance with what is stated in section 6.2.5.4 below, the Initial Margin Amount shall be equivalent to the requirement in accordance with said model. ... Non-Centrally Cleared Over-the-Counter Derivative Transactions:
to Derivative Transactions whose clearing and settlement of the respective obligations is not carried out through clearing houses or institutions abroad that act as central counterparties.
...
Initial Margin Threshold: the equivalent to the amount referred to in Annex 6 of these Rules, calculated based on the value of the UDI corresponding to the date on which the respective calculation is carried out, in accordance with section
6.2.5.2 of these Rules.
...”
“3.1.3 Each Credit Institution and, where applicable, the FND that have authorization to conclude Derivative Transactions on their own behalf in terms of these Rules must send to Management during the month of March of each year, a communication issued by their respective audit committee in which it states that such Entities comply with the requirements stated in Annex 1 of these Rules, in relation to those Derivative Transactions they carry out and with the Underlyings subject to such transactions. Regarding this, they must accompany in the referred communication, the audit report or opinion that was presented to the audit committee with which it concludes that compliance with what is established in
Annex 1 of these Rules is met and in which it must clearly state the areas and procedures audited, as well
as the different procedures that were carried out for the verification of compliance with such requirements.
...
...”
“4. AUTHORIZED COUNTERPARTIES
...
...
...
Credit Institutions and the FND may only carry out Credit Derivative Transactions with other Credit Institutions authorized by the Bank of Mexico to conclude such Derivative Transactions on their own behalf, with other Mexican financial entities authorized to carry out such transactions or with Foreign Financial Entities. ...” “5.1 ... ... ...

Tuesday, March 14, 2023 OFFICIAL GAZETTE 5
...
...
...
Entities, Investment Funds, General Warehouses and Sofomes that conclude Non-Centrally Cleared Over-the-Counter Derivative Transactions must provide for this type of Derivative Transactions, among others, the following aspects:
a) Processes for verification with their counterparties (reconciliation), regarding the form and terms in which the valuation of this type of Derivative Transactions concluded with such counterparties will be carried out periodically, as well as, where applicable, the assets that are provided as guarantee; b) Mechanisms for the resolution of disputes that, where applicable, arise with their counterparties, related to the execution of the verification processes referred to in the previous subparagraph; c) The entity that will act as calculation agent to carry out the valuation of this type of Derivative Transactions, as well as, where applicable, the entity that will act as valuation agent of the assets provided as guarantee, in accordance with subparagraph a) above; d) The methodology to determine the settlement amount of this type of Derivative Transactions that are in force, in case of assignment of rights or early maturity of such Derivative Transactions, and e) Procedures to periodically evaluate the possibility of carrying out regularly the compression of this type of Derivative Transactions concluded with their counterparties.”
6. GUARANTEES
“6.1 GENERAL GUARANTEES
Entities, Investment Funds, General Warehouses and Sofomes may guarantee the compliance of Derivative Transactions through cash deposits, credit rights in their favor or the titles or securities in their portfolio.
Regarding Forward Transactions, Option Transactions, Swap Transactions, Credit Derivative Transactions, as well as any others that, where applicable, the Bank of Mexico authorizes in terms of section 3.4 of these Rules, that Entities, Investment Funds, General Warehouses and Sofomes carry out in over-the-counter markets, they may only grant the guarantees mentioned in the previous paragraph, when the counterparties are Credit Institutions, Brokerage Houses, Foreign Financial Entities, Investment Funds, specialized investment societies for retirement funds, Sofomes, as well as any other counterparty that authorizes the Bank of Mexico. Entities and Investment Funds in no case may receive subordinate obligations as guarantee for the compliance of the Derivative Transactions they conclude. Likewise, Entities may not receive in guarantee shares issued by financial entities or controlling societies of financial groups.” “6.2 MARGINS” “6.2.1 Entities and Investment Funds that conclude Non-Centrally Cleared Over-the-Counter Derivative Transactions must agree with those counterparties referred to in these Rules to carry out the exchange of Margins through their reciprocal constitution in accordance with these same Rules.” “6.2.2 Entities and Investment Funds will not be obligated to agree with any of the following counterparties on the exchange of Margins referred to in the previous section:
a) the Mexican Federal Government; b) the Bank of Mexico; c) the Institute for the Protection of Bank Savings; d) governments or central banks of foreign countries that have ratings, in their capacity as issuers of long-term debt securities, granted by at least two securities rating institutions authorized by the CNBV in terms of the applicable provisions, greater than or equal to the N4 rating level of the “Long-Term Credit Ratings Table in Global Scale”, included in Annex 1 of Circular 39/2020 of the Bank of Mexico, published in the Official Gazette of the Federation on October 12, 2020, as modified by subsequent resolutions; e) the International Monetary Fund; f) the International Bank for Reconstruction and Development, member of the World Bank Group; g) the International Finance Corporation, member of the World Bank Group; h) the Bank for International Settlements; i) the Inter-American Development Bank, and j) multilateral development or promotion organisms, other than those indicated in the previous subparagraphs, that the Bank of Mexico authorizes to be exempted, provided that such organisms, as well as more than half of the governments or central banks that integrate them, have ratings, in their capacity as issuers of long-term debt securities, granted by at least two securities rating institutions authorized by the CNBV in terms of the applicable provisions, greater than or equal to the N4 rating level of the “Long-Term Credit Ratings
Table in Global Scale”, included in Annex 1 of Circular 39/2020 of the Bank
of Mexico, published in the Official Gazette of the Federation on October 12, 2020, as modified by subsequent resolutions.”
“6.2.3 In case Entities and Investment Funds conclude Master Clearing Agreements for the Derivative Transactions referred to in section 6.2.1, or contracts for the exchange of Margins referred to in section 6.2.9.2, they must:
a) Carry out an independent legal review, through an independent internal unit of the risk areas and the risk-taking areas or, where applicable, an independent third party to verify, as well as keep written documentation of it, that:
i. Where applicable, the Master Clearing Agreement meets the characteristics established
in the definition of said term included in section 1.1 above, and
ii. In the event of a legal dispute, including that which arises from an Event of
Default, it is reasonable to suppose that the competent jurisdictional authority has sufficient elements to determine that the respective agreement is legally valid, binding and enforceable under the legislation of the corresponding jurisdiction, and b) Establish and maintain written procedures to be aware of changes in applicable legislation, as well as to ensure that the agreement in question continues to preserve the characteristics of the referred definition. In the event that the document in which the verification provided for in the previous subparagraph a) has been drafted in a language other than Spanish, when the Bank of Mexico so requires, the Entity or Investment Fund that corresponds must present it together with its corresponding official translation into Spanish issued by a certified translator expert.” “6.2.4 Entities and Investment Funds must carry out the administration or custody of the assets they receive as guarantee in connection with the exchange of Initial Margins in the conclusion of Non-Centrally Cleared Over-the-Counter Derivative Transactions, through: i) an authorized clearing house in terms of the “Rules to which participants in the derivatives contract market must adhere”, issued jointly by the Bank of Mexico, the SHCP and the CNBV; ii) institutions abroad that act as central counterparties in derivatives exchanges and/or over-the-counter markets abroad, and that have been recognized by the Bank of Mexico with that character, in accordance with section 7.6; iii) a foreign financial market infrastructure; iv) a Foreign Financial Entity that acts as administrator or custodian of assets, or v) by the Entities themselves. Entities and Investment Funds, to carry out the contracting of the subjects referred to in subparagraphs iii) and iv) of the previous paragraph that provide them with the services of administration or custody of the assets they receive as guarantee in connection with the exchange of Initial Margins in the conclusion of Non-Centrally Cleared Over-the-Counter Derivative Transactions, must have the approval of their respective risk committees, based on an independent legal review carried out by an independent expert and with knowledge of the regulation applicable in the jurisdiction where the foreign financial market infrastructure or the Foreign Financial Entity in question is located, in which it must be stated that the administration and custody of the guarantees for concepts of Initial Margins meets the requirements established in section 6.2.9.2 of these Rules.

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Tuesday, March 14, 2023 OFFICIAL GAZETTE 7
The aforementioned legal review, regarding the subjects referred to in subsection iii) of this section, must additionally state that the financial market infrastructure of the foreign entity in question adheres to the “Principles applicable to financial market infrastructures”, issued by the Committee on Payments and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions. A legal review requested for such purpose by the Mexican Bank Association, A.C., or the Mexican Securities Institutions Association, A.C., shall be considered independent and, therefore, compliant with the provisions of the first paragraph of this section. For this effect, the legal review in question must comply with the requirements established in the second and third paragraphs of this section and be submitted to the consideration of the respective risk committee of the corresponding Entity or Investment Fund. In any case, Entities and Investment Funds must verify that assets pledged as collateral are segregated in special accounts that allow their agile transfer to facilitate their immediate recovery upon the declaration of insolvency of their counterparties.” “6.2.5. INITIAL MARGINS” “6.2.5.1. The Entity and the Investment Fund that enter into an Un-Cleared Over-the-Counter Derivative Transaction must receive from the respective counterparty, as well as contribute to it, the corresponding Initial Margin Amount, in any of the following cases:
a) When the counterparty is an Entity or Investment Fund, regardless of the current average notional amount corresponding to its Un-Cleared Over-the-Counter Derivative Transactions; b) When the counterparty is a Foreign Financial Entity that is obligated to exchange Initial Margins in accordance with the regulation applicable to it, or when the current average notional amount corresponding to its Un-Cleared Over-the-Counter Derivative Transactions, including those of its Affiliated Entities, exceeds the threshold for the exchange of Initial Margins, as referred to in section 6.2.5.6 of these Rules, or c) When the counterparty is a national or foreign non-financial entity, whose current average notional amount corresponding to its Un-Cleared Over-the-Counter Derivative Transactions, including those of its Affiliated Entities, exceeds the threshold for the exchange of Initial Margins, as referred to in section 6.2.5.6 of these Rules. Without prejudice to the above provisions in this section, Entities and Investment Funds may, voluntarily, agree on the exchange of Initial Margins with any financial entities, as well as with any non-financial entities, prior authorization from the Bank of Mexico. For this effect, the mentioned Entities and Investment Funds must submit their respective requests to the Management Department, identifying the type of Un-Cleared Over-the-Counter Derivative Transactions to be carried out, the characteristics of the assets used as collateral, as well as compliance with the requirements defined in section 6.2.9.2 and the motivation for the practice of exchanging Initial Margins, as well as any other information that the Bank of Mexico deems pertinent to require in the process of attending to the request in question. For the purposes of what is provided in this section, the parties to an Un-Cleared Over-the-Counter Derivative Transaction cannot offset the amounts corresponding to the Initial Margin that they must contribute and receive in relation to said Derivative Transaction in accordance with the foregoing.” “6.2.5.2 The Entity and the Investment Fund referred to in the first paragraph of section 6.2.5.1 above must calculate the respective Initial Margins for all Sets of Compensable Operations and all Un-Cleared Over-the-Counter Derivative Transactions in accordance with what is established in these Rules, no later than the next Business Day after the date on which any of the following circumstances occur:
a) Said Entity or Investment Fund enters into a new Un-Cleared Over-the-Counter Derivative Transaction with the counterparty in question or adds a new Un-Cleared Over-the-Counter Derivative Transaction to the Set of Compensable Operations; b) The settlement or early maturity of the Un-Cleared Over-the-Counter Derivative Transaction in question entered into with said counterparty takes place, or an Un-Cleared Over-the-Counter Derivative Transaction expires or is removed from the Set of Compensable Operations; c) Payment or delivery is made in accordance with the Un-Cleared Over-the-Counter Derivative Transaction in question, other than the contribution and receipt of Margins, or for any other reason, the notional amount, term, or type of Underlying of the Un-Cleared Over-the-Counter Derivative Transaction is modified, or d) No Initial Margin calculation has been performed in the previous ten Business Days. Entities and Investment Funds, in the cases referred to in section 6.2.5.1, must comply with the Initial Margin requirements indicated in said section on each Business Day comprised in the period that begins on the Business Day following the Celebration Date of the respective Un-Cleared Over-the-Counter Derivative Transaction and concludes on the date of its settlement, maturity, or expiration, as applicable. For the purposes of what is provided in the aforementioned section 6.2.5.1 and subject to what is stated in the following section 6.2.8, the Initial Margin that the Entity or Investment Fund must contribute and receive in accordance with the first mentioned section must be an amount equivalent to the greater of the following values:
a) Zero, or b) The result of subtracting the Initial Margin Threshold from the Initial Margin Amount. In the event that the Entity or Investment Fund in question has previously applied, to the same counterparty or any of its Affiliated Entities, the Initial Margin Threshold, totally or partially, with respect to another Un-Cleared Over-the-Counter Derivative Transaction, the corresponding amount will not be included in the Initial Margin Threshold that is used in the subtraction indicated in this subsection.” “6.2.5.3 Standardized Model for the Calculation of Initial Margin In the event that the Entity or Investment Fund that enters into an Un-Cleared Over-the-Counter Derivative Transaction does not use an internal model for the calculation of Initial Margins authorized in accordance with what is provided by the following section 6.2.5.4, it must calculate the Initial Margin Amount that it must grant and receive in accordance with sections 6.2.5.1 and 6.2.5.2 of these Rules in conformity with the following subsections:
a) The notional amounts of each of the Un-Cleared Over-the-Counter Derivative Transactions of a Set of Compensable Operations will be multiplied by the respective factors indicated in the table of Annex 4. For the purposes of the foregoing, the following circumstances must be observed, if applicable:
i. In the event that a clear type of Underlying can be identified for an Un-Cleared Over-the-Counter Derivative Transaction, it will be assigned to the corresponding category for that type provided in Annex 4.
In the event that the provision in the preceding paragraph cannot be met, Un-Cleared Over-the-Counter Derivative Transactions will be assigned to the category with the highest factor among the relevant Underlying type categories.
ii. Regarding Un-Cleared Over-the-Counter Derivative Transactions that have more than one notional amount, the notional amount that serves as reference to determine the payment flows to be received from the corresponding counterparty must be used, for the purpose of determining the Initial Margin Amount to be granted or received.
iii. Regarding Currency Swap Transactions, whose contract contemplates the exchange of notional amounts, the factor from Annex 4 that must be used will be the one corresponding to Un-Cleared Over-the-Counter Derivative Transactions on interest rates, considering the notional amount associated with the exchange of money flows.
iv. In the case of Un-Cleared Over-the-Counter Derivative Transactions whose notional amounts are denominated in Currencies other than the United States dollar, the notional amounts must be converted to said dollars, for which they must consider the exchange rate prevailing for the corresponding Currencies against said dollar in international markets at the close of operations on the day in question. To establish the equivalence of the national currency with the United States dollar, the exchange rate to be used will be the exchange rate to settle obligations denominated in currencies payable in the Mexican Republic, published by the Bank of Mexico in the Official Gazette corresponding to the Business Day on which the calculation is made.

Tuesday, March 14, 2023 OFFICIAL GAZETTE 9 b) Likewise, the Gross Initial Margin must be calculated, defined as the sum of the products referred to in subsection a) above, with respect to all Un-Cleared Over-the-Counter Derivative Transactions that correspond. c) Additionally, the net/gross ratio will be calculated, expressed as the quotient between the net replacement value, equivalent to the total market value for all Un-Cleared Over-the-Counter Derivative Transactions included in the same Set of Compensable Operations, with the same determined counterparty (numerator) and the gross replacement value of those same Derivative Transactions, equivalent to the sum of said Derivative Transactions, with respect to which their market value is a positive value (denominator). The market value of the Derivative Transactions must be considered, regarding the Initial Margin to be received, from the perspective of the Entity or Investment Fund itself and, in the case of the Initial Margin to be delivered, from the perspective of the counterparty. For these effects, the net/gross ratio, expressed as “RNBj”, will be calculated as the result of the following formula:
where:
ratio between the net replacement value and the gross replacement value of the Un-Cleared Over-the-Counter Derivative Transactions included in the same Set of Compensable Operations, with counterparty “j”. market value of the Un-Cleared Over-the-Counter Derivative Transaction “i” with counterparty “j”, included in a Set of Compensable Operations. the arithmetic operation of summing the values of all Un-Cleared Over-the-Counter Derivative Transactions “i” included in the same Set of Compensable Operations, entered into with counterparty “j”, calculated in accordance with the foregoing. To calculate the ratio, all Un-Cleared Over-the-Counter Derivative Transactions entered into with counterparty “j”, included in the same Set of Compensable Operations must be considered, regardless of whether said operations are subject to the Initial Margin requirements established in these Rules. In the event that, for a certain group of Un-Cleared Over-the-Counter Derivative Transactions with the same counterparty, included in the same Set of Compensable Operations, the denominator of the ratio is equal to 0 (zero), then the value of RNBj will be equal to 0 (zero). d) Based on the above calculations, the Initial Margin Amount for Un-Cleared Derivative Transactions entered into with the same counterparty and included in the same Set of Compensable Operations will be determined as the Net Initial Margin resulting from applying the following formula:
Net Initial Margin = (0.4 * Gross Initial Margin) + (0.6 * RNBj * Gross Initial Margin) where the symbol “*” represents the arithmetic operation of multiplication of the factors between which said symbol is located, and the Gross Initial Margin refers to the one calculated in accordance with subsection b) above. e) To calculate the Initial Margin Amount for those Un-Cleared Over-the-Counter Derivative Transactions that have not been included in any Set of Compensable Operations, Entities and Investment Funds must multiply the notional amount of each Derivative Transaction by the factor from Annex 4 that corresponds, based on the type of Underlying and remaining term, in accordance with subsection a) above.” “6.2.5.4 Internal Model The Entity or Investment Fund that is obliged to contribute or receive an Initial Margin in accordance with these Rules may calculate the Initial Margin Amount for one or more Un-Cleared Over-the-Counter Derivative Transactions entered into with the same counterparty, through the use of an internal model, prior authorization from the Bank of Mexico, in terms of what is provided in this section. The request for authorization of the internal model referred to in this section may be presented by the Entity or Investment Fund in question, or through the Mexican Bank Association, A.C., or the Mexican Securities Institutions Association, A.C. For the purposes of what is provided in this section, the authorization requests indicated in the preceding paragraph must be submitted in writing to the Management Department and accompanied by the following documentation:
a) The list of identified risk sources that could result in future credit exposure regarding each type of Derivative Transaction to which the internal model will be applicable, as well as the justification for considering said risk sources. For this effect, in the preparation of said list, they must take into account at least:
i. the movements of the market value of all Derivative Transactions that the Entity or Investment Fund has entered into, as well as high volatility events;
ii. the credit quality of the issuers of the underlying assets that affect the value of the Derivative Transactions, when applicable, and
iii. the risk associated with Derivative Transactions that contemplate that their settlement will be in kind.
b) Methodology to measure its exposure to the identified risk sources for each type of Underlying, prepared with information from a historical period of minimum three years and no more than five years that incorporates:
i. a minimum period of 9 months that considers events occurred during the 24-month period comprised between 2008 and 2009, or a different period, prior authorization from the Bank of Mexico. For this effect, they must include in their request a description of the selected period, as well as evidence showing the reasonableness of said period to reflect financial stress conditions greater than those observed between the years 2008 to 2009, for which they must include statistics related to the identified risk sources.
ii. a rolling period of minimum one and maximum three immediate years prior to the moment of carrying out the measurement in question.
Likewise, the methodology referred to in this subsection b) must:
i. Determine the potential future exposure of the Un-Cleared Over-the-Counter Derivative Transactions included, in their case, in the same Set of Compensable Operations in question, as the estimation of the confidence level at a single tail of 99 percent for the increase in the value of an Un-Cleared Over-the-Counter Derivative Transaction or the Set of Compensable Operations derived from the instantaneous shock in its respective value or values, equivalent to a movement in the most relevant risk factors, including stock indices and interest rates, during a time period equivalent to the lesser of the time horizon for closing positions with respect to the Un-Cleared Over-the-Counter Derivative Transaction or the Set of Compensable Operations in question or its maturity.
ii. Determine and justify the risk factors associated with each of the identified risk sources in accordance with subsection a) above. For this effect, Entities and Investment Funds must determine a time horizon for closing positions of ten Business Days. Without prejudice to the foregoing, Entities and Investment Funds may consider a longer time horizon than that indicated for each Derivative Transaction, which must be in accordance with their operational and processing capabilities for managing defaults.
iii. Model the integration resulting from the most relevant combinations of the main risk factors to estimate the potential future exposures of the Derivatives in question.
iv. Recognize, in their case, the compensation between Derivative Transactions entered into with the same counterparty, provided that these have been carried out under the same Master Netting Agreement, as well as that the Derivative Transactions in question have been classified by type of Underlying.
v. Establish criteria for classifying Derivative Transactions based on the type of Underlying, which must ensure that those Derivative Transactions on more than one type of Underlying are classified only in one category. In any case, said criteria may establish the conditions under which a Derivative Transaction could change classification. Such classification will not limit the identification of the risk factors referred to in subsection i) above.

Tuesday, March 14, 2023 OFFICIAL GAZETTE 11
These criteria may establish the conditions under which a Derivative Transaction could change classification. Such classification will not limit the identification of the risk factors referred to in subsection i) above. c) Documentation demonstrating the performance or verification, as well as the results, at least every twelve months, of:
i. Evaluations on the reasonableness of the internal model to be authorized by the Bank of Mexico, in terms of these Rules;
ii. Reviews of the information used in the calibration of the internal model, and
iii. Backtesting and adjustment tests of the factors and risk sources reflected by the internal model, as well as of the assumptions used in the design of the internal model to be authorized.
The tests referred to in this subsection must be carried out through mechanisms, such as backtesting performance tests and sensitivity analysis, in order to evaluate whether the internal model reflects the confidence level referred to in subsection b), second paragraph, subsection i) of this section, and if it reflects an amount of Initial Margins for Un-Cleared Over-the-Counter Derivative Transactions consistent with the levels and limits of risk identified. For this effect, the characteristics of the Un-Cleared Over-the-Counter Derivative Transactions entered into, the reliability of the information used in the internal model to be authorized, and the reasonableness of the period used in the calibration for each type of Underlying must be considered, as well as the adequacy and effectiveness of the duration of the time horizon for closing positions referred to in subsection b) of this section. The results of the tests referred to in this subsection must be documented and the levels and limits of risk associated with those risks that are identified through their Internal Margin Model must be evaluated. d) Evaluation of the internal model to be authorized carried out by an internal audit, external audit, or independent experts from the risk areas and the risk-taking areas, provided that they demonstrate professional experience in these topics related to market, credit (counterparty), liquidity, and operational risks. The Bank of Mexico, through the Management Department, may require additional documentation and information that it considers appropriate for the determination it must make. In the event that the Bank of Mexico does not respond to the authorization request within a period of thirty Business Days, counted from the date of its presentation, it will be understood that the resolution was negative towards the applicant. In the case that the Bank of Mexico authorizes an internal model requested by one of the associations mentioned in the first paragraph of this section, each Entity wishing to adhere to said model must indicate it through a written communication to the Management Department. Entities and Investment Funds that use an internal model authorized by the Bank of Mexico to determine the Initial Margin requirements for Un-Cleared Over-the-Counter Derivative Transactions must send to the Management Department, during the month of August of each year, the following documentation:
i. Results of the backtesting performance tests and sensitivity analysis referred to in subsection c) above.
ii. Opinion approved by the risk committee or equivalent body, through which it is certified that the framework for comprehensive internal risk management complies with all and each of the aspects described in subsections a) to d) above.
iii. Rules and procedures for obtaining information, in a timely manner, considering the availability of reliable data, to discard erroneous data and identify missing values.
iv. Internal control policies and procedures approved by its audit committee and presented to the Board of Directors or the Board of Trustees, or equivalent bodies or

12 OFFICIAL GAZETTE Tuesday, March 14, 2023

whoever performs the functions as appropriate, which must consider the verification of the implementation, at least every twelve months, of the evaluations on the reasonableness of the internal model authorized by the Bank of Mexico, in accordance with these Rules.

v. Policies and processes to document and disclose the results of the tests performed, as well as, where applicable, the adjustments that need to be made, in accordance with subsection c), sub-subsection iii) of this section, to executives and other governing bodies responsible for decision-making. Likewise, they must establish the policies, processes, and means of disclosure, regarding the adjustments that result as necessary in accordance with what is stated in the aforementioned subsection c), sub-subsection iii), to their counterparties.

vi. Procedures to determine if the resources available to cover the Initial Margins for Non-Centrally Cleared OTC Derivatives under the assumptions of the internal model are sufficient.

After the first submission of the aforementioned documentation, the documentation regarding sections iii) to vi) above must be sent annually, only when there are updates regarding the documentation sent in the previous period.

In the event that the backtesting performance tests do not reflect the confidence level referred to in subsection b), second paragraph, sub-subsection i) of this section, of the internal model authorized by the Bank of Mexico, the areas responsible for performing the aforementioned evaluations, reviews, and tests must inform, no later than the next Business Day, of such situation to the audit committee or equivalent body, which must give its approval regarding the work plan that the areas responsible for the development and maintenance of the internal model present to it, to remedy the detected deficiencies, within a period that will not exceed six months counted from the date of performance of the aforementioned evaluations, reviews, and tests. While the detected deficiencies are not corrected, the Initial Margins for Non-Centrally Cleared OTC Derivatives determined with the internal model must be increased by an amount equivalent to the percentage, determined by the Risk Committee or equivalent body of the Entity or Investment Fund, with respect to the Initial Margins for Non-Centrally Cleared OTC Derivatives that would be obtained under the standardized model referred to in section 6.2.5.3. This measure must be reported to the Bank of Mexico no later than ten Business Days after the date in which the deficiencies in the model's performance, indicated in this paragraph, were detected.

In the event that the backtesting performance tests do not reflect the confidence level referred to in fraction b), second paragraph, sub-subsection i), of this section, and these are not remedied within the aforementioned period, the Bank of Mexico will revoke the authorization to use the internal model to the Entities and Investment Funds, and they must calculate the Initial Margins for Non-Centrally Cleared OTC Derivatives in accordance with the standardized model referred to in section 6.2.5.3.

The Bank of Mexico may revoke the authorization to use an internal model when it ceases to comply with what is established in these Rules, or when repeatedly the results of the backtesting performance tests, referred to in subsection c) above, do not conform to what is indicated in this section.

Entities and Investment Funds that have the authorization of the Bank of Mexico to calculate their Initial Margins for Non-Centrally Cleared OTC Derivatives through an internal model, must use the latter for a period of at least twelve months counted from the date of the most recent authorization.”

“6.2.5.5 Non-Centrally Cleared OTC Derivatives Excepted from Initial Margin Exchange

Entities and Investment Funds will not be obligated to exchange Initial Margins regarding the following Non-Centrally Cleared OTC Derivatives:

a) Option Transactions in which the Entity or Investment Fund in question is the party that makes the respective premium payment to guarantee the execution of such Derivative Transaction. In this case, the aforementioned Entity or Investment Fund will not be obligated to provide Initial Margins for these transactions, without prejudice to its obligation to receive from the counterparty the corresponding Initial Margins.

b) Forward Transactions on Currencies, provided that the settlement of such transactions is in kind.

Tuesday, March 14, 2023 OFFICIAL GAZETTE 13

c) In the case of Swap Transactions on Currencies, whose contract establishes the exchange of notional amounts, the exemption applies only with respect to the settlement associated with said exchange and provided that the calculation of the Initial Margin Amount is carried out by using an internal model.

d) Non-Centrally Cleared OTC Derivatives entered into with other Entities or Investment Funds of the same financial groups in Mexico to which they belong and with which they have entered into the Derivative Transactions in question, or with Foreign Financial Entities belonging to the Financial Consortia to which the aforementioned Entities and Investment Funds belong, provided that, such Entities and Investment Funds present to the Bank of Mexico and this approves that the Derivative Transactions in question: i) are subject to adequate and centralized procedures for risk evaluation, measurement, and control; ii) are included in a consolidation scheme at the level of the financial group in Mexico, or the Financial Consortium, and iii) where applicable, the Bank of Mexico has determined that the jurisdiction in which the Foreign Financial Entity belonging to the same Financial Consortium is located has an equivalent regulatory regime in terms of margin exchange in connection with the celebration of Derivative Transactions.

In addition to what is provided above in this section, when Entities and Investment Funds enter into Non-Centrally Cleared OTC Derivatives with the same counterparty, which are of the same type of transaction, type of Underlying, residual maturity, denomination and settlement currency, and whose economic effects result in the reduction of the net exposure associated with variations in market conditions, the Initial Margin requirement for such Derivative Transactions may be calculated on the net notional amount with that counterparty with respect to the respective Derivative Transactions. The aforementioned calculation may be made independently of the benefits associated with the recognition of the Master Netting Agreements indicated in section 6.2.7 of these Rules.

“6.2.5.6 Threshold for Initial Margin Exchange

For the purposes of what is provided in section 6.2.5.1, the threshold for Initial Margin exchange will be equivalent to the amount referred to in Annex 6 of these Rules, which will be calculated taking as reference the average notional amount of all Non-Centrally Cleared OTC Derivatives that the counterparty in question, including its Affiliated Entities, maintains active on the last day of the month, during the months of March, April, and May, of the previous calendar year. For this purpose, the official value of the UDI corresponding to the last Business Day of each of the three previous months will be considered.

Without prejudice to what is provided in the first paragraph of this section, Entities and Investment Funds may agree with their counterparties that have the status of financial entity or, with prior authorization of the Bank of Mexico, with their other authorized counterparties, to voluntarily apply the Initial Margins referred to in these Rules, granting and receiving the guarantees referred to in the first paragraph of section 6.2.9.

Regarding information related to the average notional amount of all Non-Centrally Cleared OTC Derivatives of their counterparties, referred to in the first paragraph of this section and the previous section 6.2.5.1, Entities and Investment Funds must request such information from each of them, as well as keep a record of said amount. The aforementioned information must be updated annually.”

“6.2.6 VARIATION MARGINS

The Entity or Investment Fund that enters into a Non-Centrally Cleared OTC Derivative Transaction must receive from counterparties that have the status of Entity, Investment Fund, Foreign Financial Entity, or other national or foreign non-financial entity, the Variation Margin, equivalent to the amount calculated daily in accordance with this section, in case such amount is positive, or provide to such counterparty the Variation Margin in case the referred Variation Margin amount is negative.

The amount of the Variation Margin that must be exchanged in accordance with the previous paragraph, will be that determined in accordance with the following:

14 OFFICIAL GAZETTE Tuesday, March 14, 2023

Where:

amount of the Variation Margin that must be exchanged on the corresponding calculation date.

market value of the Non-Centrally Cleared OTC Derivative Transaction “i” with counterparty “j”, included in a Set of Nettable Transactions, active on the corresponding calculation date “t”.

value of all Variation Margin previously received from counterparty “j”.

value of the Variation Margin previously provided to counterparty “j”.

Regarding Non-Centrally Cleared OTC Derivatives entered into with the same counterparty under the same Master Netting Agreement, Entities and Investment Funds may recognize said agreement in the determination of the amount of the Variation Margin, corresponding to such transactions, in accordance with what is stated in the previous paragraph.”

“6.2.6.1 Non-Centrally Cleared OTC Derivatives Excepted from Variation Margin Exchange

Entities and Investment Funds will not be obligated to exchange Variation Margins regarding Forward Transactions on Currencies, provided that the settlement of such transactions is in kind.”

“6.2.7 MASTER NETTING AGREEMENTS

To carry out the calculations of the Initial Margin using an internal model in accordance with section 6.2.5.4 of these Rules or of the Variation Margin in accordance with the previous section 6.2.6, the Entity or Investment Fund in question may take into account the net amounts of the corresponding Non-Centrally Cleared OTC Derivatives in accordance with what is provided by this section.

In the event that one or more Non-Centrally Cleared OTC Derivative Transactions are entered into in accordance with the same Master Netting Agreement between an Entity or Investment Fund and any other counterparty, the Entity or Investment Fund may carry out the calculation of the Margins in accordance with these Rules based on net amounts with respect to all Non-Centrally Cleared OTC Derivative Transactions subject to said agreement.

If the Entity or Investment Fund, after carrying out the legal review referred to in the previous section 6.2.3, concludes that the agreement entered into with the respective counterparty does not meet the characteristics established in the definition included in the previous section 1.1 for the Master Netting Agreement, such Entity or Investment Fund must treat the respective Non-Centrally Cleared OTC Derivative Transactions based on gross amounts to carry out the calculation of the Margins that the Entity or Investment Fund itself must receive.”

“6.2.8 MINIMUM TRANSFER AMOUNT

The Entity or Investment Fund that enters into any Non-Centrally Cleared OTC Derivative Transaction with a specific counterparty will be obligated to provide or receive Margins in accordance with what is provided in sections 6.2.5 and 6.2.6, until the accumulated sum of the Initial Margin Amounts and the Variation Margin amounts calculated daily in accordance with said sections exceeds the equivalent to the amount referred to in Annex 6 of these Rules, considering the official value of the UDI corresponding to the date on which the corresponding calculation is made.

Without prejudice to the foregoing, Entities and Investment Funds may agree with their counterparties on a lower amount than the aforementioned for the exchange of Margins.

Tuesday, March 14, 2023 OFFICIAL GAZETTE 15

Until the accumulated sum referred to in the first paragraph of this section is greater than the amount referred to in that same paragraph, Entities and Investment Funds will not be obligated to perform the exchange of Margins, for which they must keep a tracking record of the exchanges they have made and those that are pending to be made.

Without prejudice to the foregoing, they must update daily on each Business Day the calculation of their Initial Margins for Non-Centrally Cleared OTC Derivatives in accordance with what is stated in section 6.2.5.

Entities and Investment Funds must determine, with the periodicity referred to in sections 6.2.5 and 6.2.6, the value of the Margins and communicate them to their counterparties on the same Business Day of their calculation. Likewise, the granting of assets as collateral in connection with the exchange of Margins must be carried out within a period that does not exceed one Business Day, counted from the date on which the respective communication was made.”

“6.2.9 ADMISSIBLE GUARANTEES AND MINIMUM VALUATIONS FOR NON-CENTRALLY CLEARED OTC DERIVATIVES”

“6.2.9.1. Entities and Investment Funds may accept as collateral assets related to the exchange of Margins they carry out with their counterparties, only cash deposits, as well as the securities or values of their portfolio indicated in Annex 5. For these purposes, Entities and Investment Funds must carry out the valuation of the referred assets based on the valuations indicated in said Annex 5. Entities and Investment Funds may not accept as collateral assets related to the exchange of Margins, those values or securities issued by the counterparty of the Non-Centrally Cleared OTC Derivative Transaction in question, or persons belonging to the same consortium or business group as said counterparty, in which the same legal entity exercises its control, in terms similar to what is stated by article 2, fraction III, of the Securities Market Law.

Regarding Derivative Transactions that are secured with assets denominated in a Currency different from the settlement currency of such transactions, an additional valuation must be applied in accordance with the referred Annex 5.

In all cases, Entities and Funds must ensure that guarantees for the concept of Initial Margins, other than cash and government securities established in Annex 5, are diversified in accordance with the policies established by the risk committee.”

“6.2.9.2 Entities and Investment Funds may only exchange Margins in accordance with what is provided in these Rules through the celebration of respective contracts that meet the following requirements:

a) They must be subject to a legal regime and a guarantee maintenance structure that allows access to received guarantees when they are in custody of a third party;

b) They must establish that, when the provider of the guarantees subject to the Margins is the one who maintains the Initial Margin, such guarantees will be maintained in custody accounts that are not subject to disposition, in case of insolvency;

c) They must allow the availability of unused guarantees to the liquidator or other responsible for the insolvency procedure of the counterparty in situation of default on the payment of the respective Non-Centrally Cleared OTC Derivative Transactions;

d) They must allow the Initial Margin to be transferred freely and timely to the providing counterparty in case of default on the payment of the respective Non-Centrally Cleared OTC Derivative Transactions by the receiving counterparty of said Margin;

e) They must allow guarantees other than cash to be transferable without any legal or regulatory restriction or third-party rights, including those of the liquidator of the providing counterparty or the third-party depositary, except for charges for commissions and expenses applicable to the maintenance of custody accounts and the charges usually imposed on all securities in a clearing system in which such guarantees can be maintained, and

16 OFFICIAL GAZETTE Tuesday, March 14, 2023

f) They must stipulate that any unused guarantee is returned in its entirety to the providing counterparty, excluding the costs and expenses incurred by the process of receipt and maintenance of the guarantee.

“6.2.9.3 The assets subject to the Initial Margin must be protected against the default or insolvency of the receiving counterparty through their segregation in one or both of the following ways:

a) Through the custody of an administrator or asset custodian, in their respective accounting and records.

b) Through other legally binding mechanisms.”

“6.2.9.4 Entities and Investment Funds must exchange the assets subject to the Margins referred to in these Rules in such a way that those assets other than cash exchanged as Initial Margin are segregated as follows:

a) When the receiving party of the assets subject to the respective Margin maintains them as owner, such assets must be segregated from the rest of the assets that are property of said party;

b) When the party constituting the respective Margin maintains the corresponding assets without having the status of owner, these must be segregated from the rest of the assets that are property of said party, and

c) When the assets subject to the guarantee are maintained under the custody of an administrator or asset custodian, in their respective accounting and records, these must be segregated from the assets that are property of the same.”

“6.2.9.5 Entities and Investment Funds that enter into Non-Centrally Cleared OTC Derivative Transactions must agree to exchange the assets corresponding to the respective Margins subject to the obligation of the receiving party to abstain from giving said assets in the subsequent constitution of any guarantee of any type, as well as to use them in any other way during the validity of said Margins. However, regarding Variation Margins constituted through cash deposits, the respective amounts may be used in the constitution of a subsequent guarantee.”

“6.2.10 SUBSTITUTE COMPLIANCE

Entities and Investment Funds that enter into Derivative Transactions with Foreign Financial Entities may determine their Margin requirements with such counterparties, through the application of the guidelines to which the latter are subject. Such Entities and Investment Funds will carry out the aforementioned, provided that they have prior authorization from the Bank of Mexico, for which they must present their respective requests, through the Management, in which they prove that:

a) The collateral assets exchanged comply with what is established in these Rules;

b) The guidelines applied in the jurisdiction of the counterparty to determine the Margins are of a public nature, and

c) The guidelines applied in the jurisdiction of the counterparty are equivalent to those established in this Rule.

The aforementioned requests must include the documented evidence that allows evaluating the compliance with the aforementioned.”

...

“7.5 ...

Entities that enter into Standardized Derivative Transactions for their own account with another Entity of the same financial group in Mexico or with a Foreign Financial Entity belonging to the same Financial Consortium may request the exemption from the requirements provided in section 5.2 and the previous paragraph, provided that they present to the Bank of Mexico and this approves that: i) they are subject to adequate and centralized procedures for risk evaluation, measurement, and control; ii) they are included in a consolidation scheme

Consolidation at the financial group level in Mexico or the Financial Consortium, and iii) if applicable, the Bank of Mexico has determined that the jurisdiction in which the Foreign Financial Entity belonging to the same consortium is located has a regulatory regime equivalent to that of Mexico regarding the negotiation and settlement of Derivative Operations.”

ANNEX 4
FACTORS TO DETERMINE INITIAL MARGINS FOR UNCOLLATERALIZED OVER-THE-COUNTER DERIVATIVE OPERATIONS UNDER THE STANDARDIZED MODEL Percent Underlying Remaining Maturity Type of Underlying Subparagraph of paragraph 2.1 2 years or less From 2 to 5 years More than 5 years Equities a), b) 15 Currencies c) 6 Inflation and Interest Rates d), e) 1 2 4 Credit f) 2 5 10 Commodities g) 15 Other Underlying h) or paragraph
3.4 15

ANNEX 5
MINIMUM HAIRCUTS APPLICABLE BY TYPE OF ADMISSIBLE ASSET AS COLLATERAL, FOR THE CONSTITUTION OF MARGINS Percent The following presents the haircuts applicable depending on the characteristics of the admissible asset as collateral, for the exchange of Margins. To determine the credit rating level by maturity, one must consult Circular 39/2020 of the Bank of Mexico, published in the Official Gazette of the Federation on October 12, 2020, as modified by subsequent resolutions.

Collateral Asset Haircut
Credit Rating Level by Maturity
Remaining Maturity Foreign Sovereigns
Other Issuers
Long Term in
Global Scale
Long Term in
Local Scale
Short Term in
Global Scale
Short Term in
Local Scale
N1
N2
N3
N4
Ni Nimx
Less than or equal to 1 year 0.5 1
From 1 to 5 years 2 4
More than 5 years 4 8
N5
N6
N7
N8
N9
N10
N1mx
N2mx
N3mx
N4mx
Nii
Niii
Niimx
Niiimx
Less than or equal to 1 year 1 2
From 1 to 5 years 3 6
More than 5 years 6 12
Bonds issued by the Mexican Federal Government, the Bank of Mexico or the IPAB (government values) Less than or equal to 1 year 0.5 From 1 to 5 years 2 More than 5 years 4 Equities and convertible titles included in main indices 15 Cash 0 Additional haircut applicable when the collateral asset and the settlement of the Derivative Operation are denominated in Currencies other than the local currency 8

18 OFFICIAL GAZETTE Tuesday, March 14, 2023
In the event that there are multiple ratings for any admissible asset as collateral, the following shall be considered:
(i) the lowest of the ratings granted to said securities in case only two ratings have been granted, or (ii) the lowest rating among the two highest ratings that have been granted, in the case that three or more ratings have been granted.

ANNEX 6
THRESHOLDS APPLICABLE TO THE EXCHANGE OF MARGINS IN OVER-THE-COUNTER DERIVATIVE OPERATIONS NOT CENTRALIZED CLEARING

1. Threshold for the exchange of Initial Margins: twenty billion UDIS.
2. Initial Margin Threshold: one hundred twenty-five million UDIS.
3. Minimum transfer amount: one million two hundred fifty thousand UDIS.

TRANSITIONAL PROVISIONS
FIRST.- This Circular shall enter into force on the next business day following its publication in the Official Gazette of the Federation, except as provided in the following transitional provisions.

SECOND.- Derivative Operations whose clearing and settlement is not carried out through clearing houses or foreign institutions acting as central counterparties, which were entered into before the entry into force of this Circular, shall not be subject to the exchange of Margins provided for in these Rules.

Entities and Investment Funds, no later than March 15, 2024, shall modify their master agreements so that such instruments establish the manner in which they will carry out the exchange of Margins referred to in these Rules, with respect to those Derivative Operations they enter into in over-the-counter markets, whose clearing and settlement is not carried out through clearing houses or foreign institutions acting as central counterparties and which shall be subject to the exchange of margins in accordance with these rules.

THIRD.- The provision in the last paragraph of paragraph 6.2.8 of these Rules, regarding the obligation to liquidate collateral assets within a period not exceeding one Business Day, shall enter into force on December 31, 2023.

FOURTH.- Derivative Operations on interest rates whose clearing and settlement is not carried out through clearing houses or foreign institutions acting as central counterparties, which were entered into before the entry into force of this Circular and which on a subsequent date are renegotiated solely for the purpose of incorporating a new reference rate to replace the aforementioned interest rates, or to adapt the conditions of the operations to facilitate such transition, shall not be subject to the exchange of Margins provided for in these Rules.

Mexico City, March 6, 2023.- BANK OF MEXICO: Director General of Central Banking Operations, Gerardo Israel García López.- Rubric.- Director General of Financial Stability, Fabrizio López Gallo Dey.- Rubric.- Director General Legal, Luis Urrutia Corral.- Rubric.- Director General of Financial System Affairs, José Luis Negrín Muñoz.- Rubric.- Directorate of Policy and Studies of Payment Systems and Market Infrastructures, Othón Martino Moreno González.- Rubric.

For any inquiries regarding the content of this Circular, the Bank of Mexico is at your disposal through the Directorate of Authorizations and Sanctions of Central Banking at telephone (55) 5237-2000 extension 3200.