Circular 25/2017 — Modifications to Circular 4/2012 (Derivatives Operations)

(First Section) OFFICIAL GAZETTE Wednesday, December 27, 2017 BANCO DE MÉXICO CIRCULAR 25/2017 addressed to credit institutions, brokerage houses, investment funds, multiple-object financial societies that have equity links with a multiple-banking institution, general warehouse deposit companies, and the financial institution, regarding modifications to Circular 4/2012 (Derivatives Operations).

At the margin, a logo that says: Banco de México.

CIRCULAR 25/2017
TO CREDIT INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT FUNDS, MULTIPLE-OBJECT FINANCIAL SOCIETIES THAT HAVE EQUITY LINKS WITH A MULTIPLE-BANKING INSTITUTION, GENERAL WAREHOUSE DEPOSIT COMPANIES, AND THE FINANCIAL INSTITUTION:
SUBJECT: MODIFICATIONS TO CIRCULAR 4/2012
(DERIVATIVES OPERATIONS)

The Banco de México, taking into consideration the need to support the efforts carried out by the financial authorities of various jurisdictions, within the framework of the policies and recommendations promoted by our country jointly with the other countries of the Group of Twenty (G-20) and the Financial Stability Board, in order to continue promoting the sound development of the financial system, has decided to implement the obligation for entities participating in the derivatives market to have the code referred to in the "Rules applicable to the Legal Entity Identifier Code (LEI Code)" for those financial entities that, from a certain amount, participate in said market.

For the above reason, based on articles 28, paragraphs sixth and seventh, of the Political Constitution of the United Mexican States, 24, 26, 27, and 36 of the Banco de México Law, 46, fraction XXV, and 46 Bis 5, fraction II, of the Credit Institutions Law, 176 of the Securities Market Law, 15, second paragraph, of the Investment Funds Law, 22 of the Law for Transparency and Ordering of Financial Services, 11 Bis 2, fraction XII, and 87-D, fourth paragraph, of the General Law of Organizations and Auxiliary Credit Activities, 9 of the Organic Law of Nacional Financiera, 6 of the Organic Law of Federal Mortgage Society, 9 of the Organic Law of the National Bank of Savings and Financial Services, 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 Organic Law of the National Bank of the Army, Air Force and Navy, 7, fraction X, and 19 of the Organic Law of the National Bank for Agricultural, Rural, Forestry and Fisheries Development, 4, first paragraph, 8, fourth and seventh paragraphs, 10, first paragraph, 14, first paragraph, in relation to 25 Bis, fraction VII, 14 Bis, first paragraph, in relation to 17, fraction I, 14 Bis 1, first paragraph, in relation to articles 25 Bis 1, fraction IV, 15, first paragraph, in relation to article 20, fraction XI, and 19 Bis, fraction V, of the Internal Regulations of the Banco de México, which grant the authority to issue provisions through the General Directorate of Financial Stability, the General Legal Directorate, the General Directorate of Financial System Affairs, the General Directorate of Payment Systems and Corporate Services, and the National Operations Directorate, respectively, as well as Second, fractions I, IV, VI, VIII, and X, of the Agreement on the Affiliation of the Administrative Units of the Banco de México, has resolved to modify the first paragraph of section 3.3; the first paragraph of section 4; the first paragraph of section 12.1, and section 12.4, and add the definition of LEI Code in section 1.1; a second paragraph to section 3.2; a third paragraph to section 3.3, and a second paragraph to section 4., shifting in order the current second, third, and fourth paragraphs of the "Rules for the Conduct of Derivatives Operations," contained in Circular 4/2012, to remain in the following terms:

RULES FOR THE CONDUCT OF DERIVATIVES OPERATIONS

“1. GENERAL PROVISIONS
1.1 …
…
LEI Code: the code referred to in the "Rules applicable to the Legal Entity Identifier Code (LEI Code)," issued through Circular 14/2015 of the Banco de México, or any other provisions that, in their case, replace them.
…”

“3.2 INVESTMENT FUNDS
…
Additionally, for the celebration of Derivatives Operations, Investment Funds must have the respective LEI Codes issued in their name, which must be valid at the time of the celebration of the respective Derivatives Operations.”

“3.3 MULTIPLE-OBJECT FINANCIAL SOCIETIES AND GENERAL WAREHOUSE DEPOSIT COMPANIES Multiple-Object Financial Societies (Sofomes) and General Warehouse Deposit Companies may carry out Derivatives Operations, without the need to comply with the requirements provided in sections 3.1.1, 3.1.2, and 3.1.3, when such operations aim to cover their own risks. … Additionally, Sofomes and General Warehouse Deposit Companies must have the respective LEI Codes issued in their name, which must be valid at the time of the celebration of the respective Derivatives Operations.”

“4. AUTHORIZED COUNTERPARTIES
Entities may carry out Derivatives Operations with any person. For these purposes, Entities must have the respective LEI Codes issued in their name, which must be valid at the time of the celebration of the Derivatives Operations.
Additionally, Entities, Investment Funds, Sofomes, and General Warehouse Deposit Companies, prior to the celebration of a Derivatives Operation with any of the counterparties indicated below, must obtain from them their corresponding valid LEI Code at the time of said celebration:
a) Other Entities, Investment Funds, Sofomes, and General Warehouse Deposit Companies, as well as insurance companies, investment fund operating societies, specialized investment societies for retirement funds, unregulated multiple-object financial societies, credit unions, development agencies, and Foreign Financial Entities, and b) Trusts, as well as legal entities other than Foreign Financial Entities, in the event that the notional amount of said Derivatives Operation, added to those of other Derivatives Operations valid at the time of the referenced celebration that, in their case, that same counterparty has carried out with the financial institution in question, exceeds an amount equivalent in national currency to 35 million UDIS, calculated based on the value of the UDI of the corresponding day. …

(First Section) OFFICIAL GAZETTE Wednesday, December 27, 2017 … …”

“12. INFORMATION
12.1 Entities, Investment Funds, General Warehouse Deposit Companies, and Sofomes that carry out Derivatives Operations, including those that are part of Structured Operations documented in the titles they issue or acquire, must provide information on such operations, in the terms, form, and deadlines established by the Banco de México, through the Financial System Information Directorate. When providing the aforementioned information, the referred financial institutions must indicate their LEI Code, as well as that of their counterparties which they have obtained in compliance with the provision of section 4, second paragraph, of these Rules. Likewise, these financial institutions must inform of any modification made to their LEI Code, as well as that of their counterparties of which they are aware, no later than 10 Business Days after the date on which the modification to their respective LEI Code became effective or they became aware of the modification to the LEI Code of the counterparty in question.
…
…
…
12.2 to 12.3 …
12.4 For the purposes of information reports, the transaction, the product, and the parties involved in each operation must be identified, using unique identifiers according to the standards established for such effect by the Banco de México. With respect to the identification of the parties, the corresponding LEI Code must be indicated in the corresponding reports.”

TRANSITIONAL PROVISIONS
FIRST.- This Circular shall enter into force the day following its publication in the Official Gazette of the Federation, except for what is provided in the following Transitional Provisions.

SECOND.- The provisions in sections 3.2., second paragraph, 3.3., last paragraph, and 4., first paragraph, regarding the obligation of Entities, Investment Funds, General Warehouse Deposit Companies, and Sofomes to have an LEI Code, shall enter into force on June 1, 2018.
The subjects mentioned in the previous paragraph must provide their respective LEI Codes to the Banco de México, in accordance with what is stated in section 12 of these Rules, no later than the date referred to in that same paragraph.

THIRD.- The provision in section 4, second paragraph, subsection a), of these Rules regarding the obligation of Entities, Investment Funds, Sofomes, and General Warehouse Deposit Companies to obtain the LEI Code of any of their counterparties that are Entities, Investment Funds, Sofomes, and General Warehouse Deposit Companies, as well as insurance companies, investment fund operating societies, specialized investment societies for retirement funds, unregulated multiple-object financial societies, credit unions, development agencies, and Foreign Financial Entities, shall enter into force on August 1, 2018.

FOURTH.- The provision in section 4, second paragraph, subsection b), of these Rules, regarding the obligation of Entities, Investment Funds, Sofomes, and General Warehouse Deposit Companies to obtain the LEI Code of any of the counterparties that are trusts and legal entities indicated in that subsection, shall enter into force on September 3, 2018.

Mexico City, December 21, 2017.- The General Director of Payment Systems and Corporate Services, Lorenza Martínez Trigueros.- Initial.- The General Director of Financial System Affairs, Jesús Alan Elizondo Flores.- Initial.- The General Director of Financial Stability, Pascual Ramón O’Dogherty Madrazo.- Initial.- The General Legal Director, Luis Urrutia Corral.- Initial.- The Director of National Operations, Juan Rafael García Padilla.- Initial.

Wednesday, December 27, 2017 OFFICIAL GAZETTE (First Section) For any consultation regarding the content of this Circular, please contact the Management of Authorizations, Consultations, and Legal Control, at the phones (55) 5237-2308, (55) 5237-2317, or (55) 5237-2000 Ext. 3200.