Circular 26/2017 — Modifications to the Procedure for Acting as Market Makers for Government Securities

Friday, January 5, 2018 OFFICIAL GAZETTE (First Section) 1 BANK OF MEXICO CIRCULAR 26/2017 directed to Credit Institutions and Brokerage Houses, regarding Modifications to the Procedure for Acting as Market Makers for Government Securities.

A logo appears at the margin, stating: Bank of Mexico.

CIRCULAR 26/2017 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 the financial agent of the Federal Government –and in response to the modifications that the Ministry of Finance and Public Credit, through letter number 305.-156/2017, dated December 29, 2017, has resolved to carry out regarding the procedure to which credit institutions and brokerage houses acting as market makers with respect to the government securities referred to in letter number 305.-027/2011 of said Ministry must adhere, as made known by this Central Bank through its Circular 5/2011, dated February 14, 2011, as well as the modifications to said procedure issued subsequently– attaches to the present copy of the aforementioned letter number 305.-156/2017, in order to make its content known to these entities, for the effects indicated therein.

The foregoing, based on what is provided in articles 28, paragraphs sixth and seventh, of the Political Constitution of the United Mexican States, 3, fraction III, 7, fraction I, and 10, of the Bank of Mexico Law, 22 of the Law for Transparency and Ordering of Financial Services, 8, paragraphs fourth and seventh, 10, first paragraph, 17, fraction I, 19 Bis, fraction V, of the Internal Regulations of the Bank of Mexico, which grant it the authority to issue provisions through the Directorate of Central Banking Provisions and the Directorate of National Operations, respectively, as well as Second, fractions VI and X, of the Agreement on the Affiliation of the Administrative Units of the Bank of Mexico.

Mexico City, December 29, 2017.- The Director of Central Banking Provisions, Mario Ladislao Tamez López Negrete.- Signature.- The Director of National Operations, Juan Rafael García Padilla.- Signature.

Friday, January 5, 2018 OFFICIAL GAZETTE (First Section) 101 "Year of the Centenary of the Promulgation of the Political Constitution of the United Mexican States" Letter No. 305.-156/2017 Mexico City, December 29, 2017

LIC. JAIME JOSÉ CORTINA MORFÍN GENERAL DIRECTOR OF CENTRAL BANKING 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 Federal 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; Sole, fractions V and VII of the Decree authorizing the Federal Executive 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 authorizing the Ministry of Finance and Public Credit 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 establishing the obligations that may be denominated in Investment Units and reforming and adding various provisions of the Federal Tax Code 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 Federal Tax Code, considers it convenient to continue fostering the development of the market for Federal Government Development Bonds with Fixed Interest Rate (BONOS) and those denominated in Investment Units (UDIBONOS).

Therefore, it has decided to modify numerals 1, I, I Bis, I Ter, VII Bis, XII, XIII, XIV Bis, XXI Bis, XXIV BIS, XXVI; 2, 2.1, 2.2, 2.3, 2.4, 2.5, 3, 3.1, 3.2, 3.3, 4, 4.1, 4.1.1, 4.1.2, 4.1.3, 4.1.4, 4.2, 4.2.1, 4.2.2, 4.2.3, 4.2.4, 4.2.5, 4.2.6, 4.2.7, 4.2.8, 4.2.8.1, 4.2.8.2, 4.2.9, 4.2.10, 4.3, 8.1, 8.2, 8.3.1, 8.4, 8.5 and 8.6, as well as Annexes 1, 2, 3 and 4, and repeal its numerals 1, VI, 5, 6, 7 and 8.3.2 as well as its Annex 5, of Letter 305.-027/2011 dated January 27, 2011, modified by Letters 305.-105/2011 dated July 26, 2011, 305.-178/2011 dated November 18, 2011, 305.-023/2012 dated February 9, 2012, 305.-085/2012 dated July 3, 2012, 305.-010/2014 dated February 7, 2014, Letter 305.-035/2014 dated May 14, 2014, Letter number 305.-059/2015, dated July 1, 2015, Letter number 305.-033/2017, dated February 28, 2017 and Letter number 305.-053/2017, dated March 30, 2017, to remain in the following terms:

“1.- DEFINITIONS ... I.- Applicants: to the Applicants for Market Maker and to the Applicants for UDIBONOS Market Maker. I Bis.- Applicant for Market Maker: to the Financial Intermediaries interested in participating as Market Makers, who present their application in accordance with what is provided in numeral 2.1 of this Letter and who do not yet function with such character. I Ter.- Applicant for UDIBONOS Market Maker: to the Financial Intermediaries who present their application in accordance with what is provided in numeral 2.1 of this Letter and who do not yet function with such character. II. to V. ... VI.- Repealed VII.- ... VII. Bis.- Code of Conduct: to that which the Ministry publishes on the internet page of the Federal Government, within the section corresponding to the Ministry or through any other authorized electronic, computing or telecommunications medium for this effect by said Ministry. VIII to XI ... XII.- Activity Index (IA): to the measurement of the activity of Market Makers and of Applicants for Market Makers, which the Bank of Mexico determines based on the methodology provided in Annex 1 of this Letter. XIII.- UDIBONOS Activity Index (IAU): to the measurement of the activity of UDIBONOS Market Makers and of Applicants for UDIBONOS Market Makers which the Bank of Mexico determines based on the methodology provided in Annex 2 of this Letter.

100 (First Section) OFFICIAL GAZETTE Friday, January 5, 2018 XIV.- ... XIV Bis.- UDIBONOS Market Maker Index (IFMU): to the measurement resulting from adding incentives and/or reducing penalties to the IAU which the Ministry determines, in accordance with what is provided in numeral 4.3 of this Letter. XV. to XXI. ... XXI. Bis.- Trading Platforms (Brokers): to the companies that administer systems to facilitate operations with securities between Financial Intermediaries, regulated by the provisions issued by the National Banking and Securities Commission, as well as those that modify or replace them. XXII to XXIV ... XXIV BIS.- Positions on Trading Platforms: to the buy and sell quotes on the Trading Platforms and on the Client Trading Systems that comply with what is established in Annexes 1 and 2 of this Letter. XXV.- ... XXVI.- Balance Placed by Primary Operations: to the nominal amount of the total titles that have been placed through Auctions, swaps, or any operation other than the loan of securities to Market Makers or UDIBONOS Market Makers, minus those that have been withdrawn from circulation by any transaction that results in their early maturity such as repurchase and swap. XXVIII. to XXXI. ...”

“2. MARKET MAKERS AND UDIBONOS MARKET MAKERS 2.1 Financial Intermediaries intending to act as Market Makers or UDIBONOS Market Makers must present a written application to the UCP, located at Insurgentes Sur 1971, Tower 3, Floor 7, Guadalupe Inn Neighborhood, C.P. 01020, Mexico City. Likewise, the aforementioned Applicants must accompany the application referred to in the previous paragraph with a declaration of commitment by which they formalize their determination to carry out their activities in terms of the guidelines established in the Code of Conduct. The aforementioned communication must be substantially identical to the format provided in annex 1 of the Code of Conduct. The Ministry will determine the Applicants who, based on what is provided in numerals 2.4 and 2.5 of this Letter, may act as Market Makers or UDIBONOS Market Makers. The appointment of Market Maker will be made under the understanding that when it comes to two or more Applicants for Market Maker belonging to the same financial group, or who are in the process of merger, only one of said Financial Intermediaries may act as Market Maker. The foregoing will also be applicable to the appointment of UDIBONOS Market Maker when it comes to two or more Applicants for UDIBONOS Market Maker belonging to the same financial group. The Ministry may require Applicants, at any time, to confirm their interest in acting as Market Makers or UDIBONOS Market Makers. Those who do not confirm such interest, by presenting a written document to the UCP at the address referred to in the first paragraph of this numeral, within a period of ten Business Days from when the notification of the aforementioned Ministry requirement takes effect, will cease to be considered as Applicants. The Ministry may require Applicants, Market Makers and UDIBONOS Market Makers, at any time, to ratify their determination to adopt the Code of Conduct. Those who do not ratify the aforementioned determination, by presenting at the address referred to in the first paragraph of this numeral the declaration of commitment referred to in the second paragraph of this numeral, within a period of ten Business Days counted from when the notification of the Ministry requirement takes effect, will cease to be considered as Applicants, Market Makers or UDIBONOS Market Makers. The Ministry will notify, through the electronic, computing or telecommunications medium determined by said Ministry, to the Bank of Mexico the name of those Applicants who have presented their application to be a Market Maker or UDIBONOS Market Maker, as applicable, as well as the name of those Applicants who have confirmed their interest in acting as Market Maker or UDIBONOS Market Maker and those who have ratified their determination to adopt the Code of Conduct. To this effect, the Ministry will attach to the notification it makes to the Bank of Mexico, as applicable, a simple copy of the aforementioned application, of the confirmation of said application, as well as of the declaration of commitment attached to said application, or of the corresponding ratification. From the receipt of the aforementioned notification, the Bank of Mexico will initiate the process of calculating the respective IA or IAU, as applicable. Likewise, the Ministry will notify, by the same means, to the Bank of Mexico the name of those Applicants who do not confirm their interest in acting as Market Maker or as UDIBONOS Market Maker. The Ministry will notify, through the electronic, computing or telecommunications medium authorized for this effect by said agency, to the Bank of Mexico and to the Market Maker or UDIBONOS Market Maker who has not ratified their determination to adopt the Code of Conduct in the terms established in this numeral, that from the tenth Business Day following the aforementioned notification they will cease to operate with such character and that they must liquidate the operations and comply with the obligations resulting from the early maturity of said operations, in accordance with what is provided in this Letter and what is stipulated in the contract. 2.2 The Bank of Mexico, in its capacity as the financial agent of the Federal Government, will calculate the IA of Market Makers and of Applicants for Market Maker, in accordance with what is provided in Annex 1 of this Letter, as well as the incentives or penalties for diversification, for Positions on Trading Platforms and Client Trading Systems and for Positions and Operation in MexDer referred to in said Annex. Likewise, regarding Applicants for UDIBONOS Market Maker and UDIBONOS Market Makers, it will calculate the IAU in accordance with Annex 2. For such purposes, the Applicants, the Market Makers and the UDIBONOS Market Makers must send to the Bank of Mexico, in the terms determined by said Central Institute, the necessary information to calculate their respective IA and IAU, as well as the incentives and penalties for diversification and for Operations in MexDer. For the calculation of incentives for Positions in MexDer, the Bank of Mexico will use the corresponding information on Points in MexDer sent by the latter in terms of said Annex 1. Subsequently, the Bank of Mexico will send the results obtained to the Ministry, in the terms that agree, and it will correspond to said Ministry to calculate the IFM and IFMU in accordance with what is provided in numeral 4.3. Finally, the UCP will make the final results known individually to the Market Makers and Applicants for Market Maker, or to the UDIBONOS Market Makers and Applicants for UDIBONOS Market Maker, as applicable. 2.3 The IA and the IAU will comprise the volume of Operations in the Primary Market, of Operations with the Client and of Operations between Intermediaries that Market Makers and Applicants for Market Maker, or UDIBONOS Market Makers and Applicants for UDIBONOS Market Maker, as applicable, carry out. The volume of operations of CETES and BONOS, or UDIBONOS, as applicable, will be calculated taking into account the information provided by both the Trading Platforms, the Client Trading Systems, as well as the Market Makers and the Applicants for Market Maker, or UDIBONOS Market Makers and Applicants for UDIBONOS Market Maker, as applicable. Operations carried out between Financial Intermediaries belonging to the same financial group will be excluded from this calculation. Additionally, the Bank of Mexico may exclude from the calculation of the IA and the IAU and from the incentives and penalties referred to in Annexes 1 and 2, the operations that it considers do not foster the liquidity and depth of the secondary government securities market, or that do not make price formation in said secondary market more efficient. The Bank of Mexico will inform the Ministry of the type of operations that, in its case, have been excluded from the calculation. 2.4 The measurement of the IA of Market Makers and Applicants for Market Maker, as well as the measurement of the IAU regarding UDIBONOS Market Makers and Applicants for UDIBONOS Market Maker, will be carried out monthly, considering for this purpose the information corresponding to measurement periods of six months. Each measurement period will include operations agreed between the 16th day of six months ago and the 15th day of the measurement month. In case any of the mentioned days is an invalid day for Financial Intermediaries, the immediate subsequent 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 measurement of the IA and the IAU will be carried out for all Applicants for Market Maker and Applicants for UDIBONOS Market Maker, respectively, who have presented the application referred to in numeral 2.1, with at least ten Business Days before the last day of the corresponding measurement period.

Friday, January 5, 2018 OFFICIAL GAZETTE (First Section) 103 2.5 To determine which Applicants may act as Market Makers or UDIBONOS Market Makers, the following procedure will be followed: a) On the first Business Day of each month, Applicants whose IFM or IFMU, respectively, calculated in accordance with what is provided in this Letter, in each of the three immediately preceding measurement periods, has been equal to or greater than 7%, may be incorporated as Market Makers or UDIBONOS Market Makers. b) On the first Business Day of each month, those whose IFM or IFMU, as applicable, calculated in accordance with what is provided in this Letter, corresponding to the immediately preceding measurement period, is less than 7%, will cease to operate as Market Makers or UDIBONOS Market Makers.”

“3. OBLIGATIONS Financial Intermediaries who are appointed by the Ministry as Market Makers or UDIBONOS Market Makers, in accordance with this Letter, must comply with the following obligations: 3.1 Present minimum positions in each of the CETES and BONOS Auctions, regarding Market Makers, or UDIBONOS, regarding UDIBONOS Market Makers, for the amount resulting from multiplying the total amount to be placed of each issuance of CETES, BONOS or UDIBONOS, as applicable, by: a) 20%, and b) the percentage resulting from dividing one by the number of Market Makers or UDIBONOS Market Makers, as applicable, existing at the time of the corresponding Auction. 3.2 Quote purchase and sale yield rates for CETES, BONOS or UDIBONOS, through Trading Platforms and Client Trading Systems, each Business Day in the hours that the Ministry informs for this effect. For this purpose, the Ministry will inform, in advance, the hours, as well as their effective date, through the internet page of the Federal Government, within the section corresponding to the Ministry or through any other authorized electronic, computing or telecommunications medium for this effect by said Ministry. The incentives and penalties corresponding to the activity of Market Makers and UDIBONOS Market Makers applicable to the quotes referred to in the previous paragraph, will be accounted for the calculation of the IFM or the IFMU, as applicable, in accordance with what is established in Annexes 1 and 2 of this Letter. The Ministry reserves the right to specify, in attention to the prevailing conditions in the markets, the maximum level of the differential between the purchase and sale yield rates quoted for each of the terms. Additionally, those quotes that the Bank of Mexico considers do not foster the liquidity and depth of the secondary market for CETES, BONOS or UDIBONOS, or that do not make price formation in said secondary market more efficient may be excluded from the calculation of the IFM or the IFMU. In its case, the Bank of Mexico will inform the Ministry of the type of positions that have been excluded from the calculation. 3.3 Comply with the provisions contained in this Letter and other applicable regulations on operations with securities and participation in the securities market; submit to the sound uses and practices of the market, as well as observe in the exercise of rights, in the carrying out of their operations and in the compliance with the obligations contained in this Letter, at least, the guidelines contained in the Code of Conduct. 3.4 to 3.5..."

“4. RIGHTS Financial Intermediaries who are appointed by the Ministry as Market Makers or UDIBONOS Market Makers, in accordance with this Letter, may carry out the following acts, in accordance with the regulations applicable to them: 4.1 Buy for their own account from the Bank of Mexico, in its capacity as the financial agent of the Federal Government, CETES and BONOS, regarding Market Makers, or UDIBONOS, regarding UDIBONOS Market Makers, at a rate equal to the rate resulting from the Auction of each of said CETES, BONOS or UDIBONOS, provided that they have complied with what is established in numeral 3.1 of this Letter. The exercise of this right of purchase must be carried out in the terms determined by the Bank of Mexico, adjusting to the following: 4.1.1 The maximum amount of CETES and BONOS, or UDIBONOS that Market Makers or UDIBONOS Market Makers, respectively, may acquire collectively, will be 25% of the total amount assigned in the Auctions for each of the terms of CETES and BONOS, or UDIBONOS.

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4.1.2 The maximum amount of CETES and BONOS, or UDIBONOS, that each Market Maker or UDIBONOS Market Maker, respectively, may request in exercising the purchase right, shall be the lesser of: a) 25% of the total amount assigned in the Auctions for each of the terms of the CETES and BONOS, or UDIBONOS, and b) the total amount of computable bids submitted by the Market Maker or UDIBONOS Market Maker in question in the Auctions for each of the terms of the CETES and BONOS or UDIBONOS.

A bid shall be considered computable for each Market Maker or UDIBONOS Market Maker, that whose yield rate is less than or equal to the product of multiplying the highest yield rate that has received allocation in the Auctions for each of the terms of the CETES and BONOS, or UDIBONOS, as applicable, by the corresponding factor from those indicated below: a) For those who registered the highest level of the IFM or IFMU, 1.0035 or 1.0115, respectively. b) For those who had the second highest level of the IFM or IFMU, 1.0030 or 1.0110, respectively. c) For the third highest level of the IFM or IFMU, 1.0025 or 1.0105, respectively. d) For other Market Makers or UDIBONOS Market Makers, 1.0020 or 1.0100, respectively.

The factors mentioned in paragraphs a), b), c) and d) above shall be applied during the respective month to the Market Makers or UDIBONOS Market Makers in question in accordance with the order in which they appear in the list published by the Secretariat pursuant to the second paragraph of section 8.2. If the aggregate demand of all Market Makers or UDIBONOS Market Makers, as applicable, through the exercise of this purchase right results in being greater than 25% of the total amount assigned to each of the Auctions, the procedure indicated in Annex 3 shall be followed.

4.1.3 Market Makers or UDIBONOS Market Makers wishing to exercise their purchase option, between 8:45:00 hours on the Business Day following the publication of the Auction results and 9:00:00 hours on the same Business Day, must inform the Bank of Mexico, through the means authorized for such purpose, of the amount of CETES and BONOS, or UDIBONOS, that they wish to purchase, respectively. In the event that, due to fortuitous event or force majeure, the aforementioned means are not available, the Bank of Mexico will communicate to them the procedure and schedule in which they may exercise their purchase right.

When a syndicated auction is held for the placement of BONOS or UDIBONOS, Market Makers or UDIBONOS Market Makers, as applicable, may not exercise their purchase option regarding BONOS or UDIBONOS, as applicable, during the week in which the said syndicated auction takes place. This is independent of the maturity term of the instrument referenced in the corresponding syndicated auction.

4.1.4 The Bank of Mexico, under the terms it determines, will inform Market Makers and UDIBONOS Market Makers of the amount of CETES and BONOS, or UDIBONOS, respectively, that will be delivered to them by the exercise of this right, and will make public the general results of such exercise.

4.2 Market Makers and UDIBONOS Market Makers may carry out securities lending operations on CETES, BONOS and UDIBONOS with the Bank of Mexico, in its capacity as financial agent of the Federal Government, under the terms determined by said Bank, subject to the following:

4.2.1 They must enter into a contract with the Bank of Mexico that will establish the characteristics of the operations provided for in this Circular, the rights and obligations of the parties, as well as the procedure for constituting and canceling the corresponding guarantees, as well as the procedures applicable to the increase, substitution or reduction of said guarantees.

4.2.2 They shall always act on their own account as borrowers. The term of the securities lending operations may be up to sixty days.

They may request the Bank of Mexico to renew the securities lending operations, provided that the value of the instruments granted as collateral complies with what is provided in the following section 4.2.5.

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Likewise, they may at any time determine the early maturity of the securities lending operations, in accordance with what is stipulated for such purpose in the respective contracts.

The Bank of Mexico shall consider the securities lending operations it maintains in force with the respective Financial Intermediary to have matured early, in case that: (i) such Financial Intermediary, solely having the status of either Market Maker or UDIBONOS Market Maker, ceases to have such status, or (ii) said Financial Intermediary, operating with both statuses, ceases to have both. The referred Financial Intermediary shall be obligated to liquidate the operations and fulfill the obligations resulting from the early maturity in question, in accordance with what is provided in this Circular and stipulated in the contract.

In the event that a Financial Intermediary having both the status of Market Maker and UDIBONOS Market Maker loses one of said statuses and retains the other, it shall pay, in accordance with what is provided in this Circular and stipulated in the contract, from the Business Day on which it lost the status in question, regarding the securities lending operations celebrated on instruments corresponding to the status lost, the factor applicable in terms of what is provided in the last paragraph of section 4.2.6.

4.2.3 Each Market Maker or UDIBONOS Market Maker may request from the Bank of Mexico any issuance of CETES, BONOS or UDIBONOS currently in the market, up to the equivalent of 2% of the total Outstanding Balance from Primary Operations of said CETES, BONOS or UDIBONOS and up to 4% of the Outstanding Balance from Primary Operations of each of the issuances of CETES, BONOS or UDIBONOS. Regarding BONOS or UDIBONOS that have been placed through an auction in terms of the Rules for the celebration of syndicated auctions of government securities, issued by the Bank of Mexico through Circular 16/2011, as well as modifications to said Rules issued subsequently, Market Makers and UDIBONOS Market Makers may request said BONOS or UDIBONOS for loan, starting from the Business Day following that on which the settlement of said syndicated auction takes place.

4.2.4 The maturity date of the CETES, BONOS or UDIBONOS requested for loan must be at least two Business Days after the maturity date of the loan.

4.2.5 Market Makers and UDIBONOS Market Makers must guarantee the securities lending operations, through the constitution of a stock pledge on CETES, BONOS, BONDES REVISABLES, UDIBONOS, BREMS or BPAS, in terms of the Securities Market Law. The value of the instruments given in stock pledge must at all times be equal to or greater than 102% of the sum of the value of the BONOS, CETES or UDIBONOS subject to the loan plus the daily premium portion charged through Indeval. For such purpose, the CETES, BONOS or UDIBONOS subject to the securities lending, as well as the instruments granted in stock pledge, shall be valued daily according to the last price vector determined by the Bank of Mexico, which shall be made known to Market Makers and UDIBONOS Market Makers, as applicable, by Indeval through the electronic procedure for the celebration of specialized securities lending operations called "VALPRE-E".

In the event that, at any time, the value of the instruments given in stock pledge, determined in accordance with the indication in the previous paragraph, corresponding to each Market Maker or UDIBONOS Market Maker, is less than the percentage required in terms of said paragraph, the Market Maker or UDIBONOS Market Maker in question must, no later than the Business Day following that on which the non-compliance with the required percentage is determined, give in stock pledge additional CETES, BONOS, BONDES REVISABLES, UDIBONOS, BREMS or BPAS sufficient to restore the percentage referred to in the cited paragraph. Until it restores the percentage in the terms provided in this paragraph, the Market Maker or UDIBONOS Market Maker in question may not celebrate securities lending operations with the Bank of Mexico on CETES, BONOS and UDIBONOS.

When the non-compliance with the required percentage persists on the Business Day following that on which the Market Maker or UDIBONOS Market Maker in question must give in stock pledge additional CETES, BONOS, BONDES REVISABLES, UDIBONOS, BREMS or BPAS sufficient in terms of the previous paragraph, the Bank of Mexico shall consider early matured one or several securities lending operations it maintains in force with the Market Maker or UDIBONOS Market Maker in question, until restoring the percentage required in terms of this section. The actions adopted by the Bank of Mexico will not exempt the Market Maker or UDIBONOS Market Maker, as applicable, from the corresponding conventional penalty for the difference between the guaranteed amount and the required 102%.

The Bank of Mexico will notify the Market Maker or UDIBONOS Market Maker in question, as well as the Secretariat, of the early maturity referred to in the previous paragraph, through some electronic, computing or telecommunications medium authorized for such purpose by the Bank of Mexico, with at least one Business Day of advance notice to the date on which the Market Maker or UDIBONOS Market Maker in question must liquidate the securities lending operations indicated for such purpose by the Bank of Mexico.

...

4.2.6 Market Makers and UDIBONOS Market Makers must pay daily to the Bank of Mexico a premium for each securities lending operation they celebrate or that is in force. The amount of said premium shall be obtained in terms of Annex 4 of this Circular.

The Bank of Mexico, in its capacity as financial agent of the Federal Government, shall be responsible for calculating this factor monthly starting on the 16th day of each month and concluding on the 15th day of the immediate next month, to be applied starting from the first Business Day of the following calendar month. In case that any of the mentioned days is not a Business Day for Financial Intermediaries, the immediate subsequent Business Day shall be taken into account for the start day and the immediate preceding Business Day for the end day of the period. For such purposes, Applicants, Market Makers and UDIBONOS Market Makers must send to the Bank of Mexico, under the terms it determines, the necessary information to measure the operability of each of them in the repo and securities lending markets. Likewise, the Bank of Mexico will inform monthly each Market Maker and UDIBONOS Market Maker of the factor that will be applied to the weighted government funding rate during the following month to calculate the corresponding premium, at least three Business Days before the close of each month, through some electronic medium authorized for such purpose by said Bank.

Applicants who incorporate into the list of Market Makers or UDIBONOS Market Makers, published by the Secretariat pursuant to section 8.2, will not be subject to the factor determined in Annex 4 of this Circular, during the two calendar months following the date of their incorporation as Market Makers or UDIBONOS Market Makers. In this case, the premium shall be determined by multiplying the weighted government funding rate by a factor of 5%.

The provisions in the preceding paragraphs will not apply to: a) securities lending operations on UDIBONOS celebrated by Market Makers who do not have the status of UDIBONOS Market Makers, or b) securities lending operations on CETES and BONOS celebrated by UDIBONOS Market Makers who do not have the status of Market Maker. In the cases mentioned in paragraphs a) and b) of this paragraph, Market Makers and UDIBONOS Market Makers, as applicable, must pay daily to the Bank of Mexico a premium for each securities lending operation they celebrate or that is in force. The amount of said premium shall be obtained by multiplying: (i) the weighted government funding rate that the Bank of Mexico calculates and makes known daily through its website www.banxico.org.mx or any other electronic, computing or telecommunications medium authorized for such purpose by said Bank, corresponding to the second Business Day prior to the date on which the respective premium must be paid to said Bank, by (ii) a factor of 100% and (iii) the result of the items above divided by 360.

4.2.7 The Bank of Mexico will notify, through the electronic, computing or telecommunications medium authorized for such purpose by said Bank, to the Market Maker or UDIBONOS Market Maker, whose Proportional Net Long Position in any of the issuances of BONOS and UDIBONOS averages 35% (thirty-five percent) or more of this percentage in monthly periods in accordance with what is stated in section 4.2.6 of this Circular. Through such notification, the Market Maker or UDIBONOS Market Maker in question will be informed that, starting from the Business Day following the notification, their right to carry out securities lending operations with the Bank of Mexico on CETES, BONOS and UDIBONOS will be suspended.

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The suspension will remain in force until the first Business Day of the immediate next month to that in which an average less than 35% (thirty-five percent) is maintained in each of the months in the Proportional Net Long Position in all issuances of BONOS and UDIBONOS for two consecutive measurement periods.

On the tenth Business Day following that on which the suspension referred to in the previous paragraph takes effect, the Bank of Mexico shall consider early matured the entirety of the securities lending operations it maintains in force with the Market Maker or UDIBONOS Market Maker in question.

The Bank of Mexico will notify the Market Maker or UDIBONOS Market Maker in question, as well as the Secretariat, of the early maturity referred to in the previous paragraph, through some electronic, computing or telecommunications medium authorized for such purpose by the Bank of Mexico, with at least one Business Day of advance notice to the date on which the Market Maker or UDIBONOS Market Maker in question must liquidate the securities lending operations indicated for such purpose by the Bank of Mexico.

4.2.8 Market Makers and UDIBONOS Market Makers may carry out securities swap operations on CETES, BONOS and UDIBONOS with the Bank of Mexico, in its capacity as financial agent of the Federal Government, under the terms determined by said Bank for such purpose, subject to the following:

4.2.8.1 Market Makers and UDIBONOS Market Makers shall always act on their own account as swap providers. Only Market Makers and UDIBONOS Market Makers who have celebrated securities lending operations in terms of what is provided in section 4.2 may participate in swap operations.

4.2.8.2 Market Makers and UDIBONOS Market Makers must celebrate swap operations with the sole purpose of using the total amount, at nominal value, of the CETES, BONOS or UDIBONOS they receive in the swap operation in question, to fully liquidate one or several securities lending operations they have celebrated in terms of what is provided in section 4.2 that correspond to the same issuance of the CETES, BONOS or UDIBONOS obtained in said swaps. The liquidation carried out by Market Makers and UDIBONOS Market Makers, in terms of what is provided in this paragraph, must be carried out on the Business Day corresponding to the day of settlement of the swap operations celebrated in accordance with what is provided in section 4.2.8.

The Bank of Mexico will notify, through the electronic, computing or telecommunications medium authorized for such purpose by said Bank, to the Secretariat and to the Market Maker or UDIBONOS Market Maker, who fails to liquidate in the time and terms established in the previous paragraph. Through such notification, they will be informed that starting from the Business Day following the notification, the Market Maker or UDIBONOS Market Maker in question will be suspended, for a period of sixty days, from their right to carry out securities lending operations with the Bank of Mexico on CETES, BONOS and UDIBONOS, as well as from celebrating the swap operations referred to in section 4.2.8. The said suspension will not exempt the Market Maker or UDIBONOS Market Maker in question from the corresponding conventional penalty.

Once the suspension period referred to in the previous paragraph has passed and provided that the Market Maker or UDIBONOS Market Maker in question has fulfilled the liquidation referred to in the first paragraph of this section, the Bank of Mexico will make such situation known to the Secretariat.

4.2.9 Upon maturity of the securities lending operations, Market Makers or UDIBONOS Market Makers must return to the Bank of Mexico CETES, BONOS and UDIBONOS of the same nominal value, species, class and series, of those that were requested for loan.

4.2.10 In the event that Market Makers or UDIBONOS Market Makers, upon maturity of the securities lending operations, do not fulfill the obligation to return to the Bank of Mexico the instruments in terms of the previous section, the Bank of Mexico will maintain ownership of the instruments given as collateral up to the amount of the obligations owed by the Market Maker or UDIBONOS Market Maker in question, derived from the securities lending.

...

108 (First Section) OFFICIAL GAZETTE Friday, January 5, 2018

4.3 The Secretariat reserves the right to provide incentives for those activities it considers beneficial for the development of the market and to penalize those behaviors that hinder its functioning. The Secretariat will inform, in advance, the actions and behaviors that will be incentivized or penalized, as well as their effective date, through the Federal Government's internet page, in the section corresponding to the Secretariat or through any other electronic, computing or telecommunications medium authorized for such purpose by said Secretariat. The incentives or penalties for the calculation of the IFM or IFMU 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 Secretariat 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 or IFMU, as applicable.”

5. to 7.2.9 Are repealed.

“8. GENERAL PROVISIONS

8.1 The Secretariat will inform each Applicant and each Market Maker or UDIBONOS Market Maker of their IFM or IFMU level, as applicable, no later than the third Business Day before the close of each month.

...

8.2 ...

Said names shall be ordered in descending order according to the IFM or IFMU achieved by each Market Maker or UDIBONOS Market Maker, respectively, in the immediate previous measurement period. Likewise, the Secretariat will attach information regarding the activities and behaviors it will incentivize and/or penalize during that measurement period, in accordance with what is provided in section 4.3, as well as the specific methods for each case. The incentives and/or penalties will be incorporated into the calculation of the IFM or IFMU as specified in Annexes 1 and 2 of this Circular.

8.3 ...

8.3.1 Updated lists of Applicants, Market Makers and UDIBONOS Market Makers, ordered in descending order according to their IFM or IFMU, as applicable.

8.3.2 Is repealed

8.3.3 to 8.3.5 ...

8.4 The activity of Market Maker and UDIBONOS Market Maker may be carried out indefinitely, provided that it complies with what is provided in this Circular and other applicable provisions.

8.5 ...

Likewise, said Secretariat will determine which Financial Intermediary may act as Market Maker or UDIBONOS Market Maker when any of the scenarios provided in the fourth paragraph of section 2.1 occurs.

8.6 Market Makers and UDIBONOS Market Makers who decide to cease operating with such status must send a written cancellation notice to the UCP, as well as a copy thereof to the National Operations Directorate of the Bank of Mexico located at Avenida 5 de Mayo number 6, first floor, Centro neighborhood, C.P. 06000, Mexico City. The said cancellation notice will take effect from the Business Day following its receipt by the aforementioned authorities. The Secretariat will remove the name of the respective Financial Intermediaries from the lists referred to in section 8.3 of this Circular.”

SINCERELY

In the absence of the Head of the Public Credit Unit, in accordance with what is provided in article 105 of the Internal Regulations of the Secretariat of Finance and Public Credit

THE GENERAL DIRECTOR OF COLLECTIONS THE ASSISTANT GENERAL DIRECTOR OF CREDIT LEGAL PROCEDURES

PABLO GONZÁLEZ DEL REAL Y SITA VÍCTOR MANUEL MASTACHE VILLALOBOS

Annex 1 Calculation of the Market Maker Index (MMI) The Market Maker Index (MMI) is the sum of the Activity Index (AI) plus incentives minus penalties for the Diversification Index (DI), plus incentives for Positions and Operations in MexDer (OM), plus incentives and penalties for Positions in Bonds and CETES (IPBC), plus other incentives and penalties that, according to section 4.3 of this Office, the Secretariat determines. The MMI will be the result of the following formula: MMI = AI + incentives – penalties The calculation methodology for the MMI is described below: I. Activity Index (AI) It corresponds to the market participation in the nominal volume weighted by duration traded directly in CETES and BONOS. The AI for intermediary j is defined by: Market participation of intermediary j in the volume traded directly in CETES and BONOS, in the considered segments, for the period defined in section 2.4 of this Office. To consider the risk of trading issuances of different terms, the nominal volume is multiplied by the duration of the instrument. The Bank of Mexico may exclude from the calculation the operations referred to in section 2.3 of this Office. The AI for intermediary j is obtained as follows: Where: ej Market participation of intermediary j in the total volume traded of CETES. Bj Market participation of intermediary j in the total volume traded of BONOS. Vj Primary Market Market participation of intermediary j in the total volume traded in the primary market (Primary). Vj Clients Market participation of intermediary j in the total volume traded with clients other than banks or brokerage houses through any means (Clients). Vj Brokers Market participation of intermediary j in the total volume traded with banks or brokerage houses through Brokerage Houses (Brokers). Where: Vj K Market participation of intermediary j in the volume traded in segment K which can be Primary, Clients or Brokers: M k Nominal amount traded by intermediary j in segment k and in instrument i. For the case of the Primary segment, it represents the nominal amount assigned in the primary auction during the measurement period defined in section 2.4 of this Office. MT k Total nominal amount traded by all intermediaries in segment k and in instrument i. For the case of the Primary segment, it represents the nominal amount assigned in the primary auction during the measurement period defined in section 2.4 of this Office. 1 Macaulay duration will be used.

di Duration expressed in years of the issuance of instrument i (CETES and BONOS) calculated for the settlement day of each operation. E Is the number of active issuances. II. Diversification Index (DI). It indicates the average number of BONOS issuances in which each intermediary j diversifies its operation. DIj Diversification index for intermediary j of the direct operation of BONOS through Brokerage Houses (Brokers) and the operation with clients other than banks or brokerage houses through any means during the measurement period defined in section 2.4 of this Office. When an intermediary does not trade 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. For the calculation of the DI, all BONOS issuances will be considered except for the two issuances that present the highest average Turnover Index in the measurement period defined in section 2.4 of this Office. The average Turnover Index is calculated based on the sum of the Turnover Indices during the measurement period, divided by the number of business days in the measurement period. These issuances will be made known to the Market Makers by the Secretariat 3 business days before the end of the calendar month through its internet portal or any other means of communication it deems appropriate. The DI is calculated as: where: R l Proportion of the nominal amount traded by intermediary j in issuance l with respect to the Placed Balance from Primary Operations. M l Nominal amount traded by intermediary j in issuance l. s l Placed Balance from Primary Operations of issuance l, which was observed on average during the measurement period. The average Placed Balance from Primary Operations is calculated based on the Business Days in which the issuance was active. RTj Sum of the R 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, DI, is obtained, it is divided by the average number of active issuances 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: Range of % of active issuances Incentive / Penalty From To (Basis points) 70% 100% 150 60% 70% 100 50% 60% 50 40% 50% 0 0% 40% -30

III. Incentives for Positions in MexDer They will correspond to the allocation of points that MexDer, in accordance with the evaluation it carries out for this purpose, makes regarding the Positions of each Market Maker and Aspiring Market Maker, according to the following methodology: ● MexDer will take 40 samples daily of the Positions presented during the trading period of the day in question. For this purpose, only those Positions with a minimum volume of 100 contracts for BONOS futures and 1,000 for CETES futures will be considered. ● For each sample, points will be assigned in accordance with the following criteria: a) If the differential between the best Buy Position and the best Sell Position of the Market Makers or Aspiring Market Makers is equal to the differential in MexDer, 10 Points will be assigned in MexDer. b) If the differential between the best Buy Position and the best Sell Position of the Market Makers or Aspiring Market Makers is less than the differential in MexDer, 15 Points will be assigned in MexDer. c) If the differential between the best Buy Position and the best Sell Position of the Market Makers or Aspiring Market Makers is greater than the differential in MexDer, 3 Points will be assigned in MexDer. d) If the Market Makers or Aspiring Market Makers have exclusively Buy or Sell Positions, 3 Points will be assigned in MexDer. e) To those Market Makers or Aspiring Market Makers whose best Buy and Sell Positions meet the differential in MexDer and have the smallest differential in the sample, an additional 10 Points in MexDer will be assigned. For the purposes of the above subsections, the differential in MexDer will correspond to that for the different classes of futures determined by MexDer and published on its internet website identified with the domain name: www.mexder.com.mx. The aforementioned differential will correspond to the differential required in a stable market, unless the Bank of Mexico determines that it will correspond to the differential required in a volatile market, for which it may request the opinion of MexDer. Market Makers and Aspiring Market Makers who obtain, in accordance with the information provided by MexDer to the Bank of Mexico, a minimum daily average of 500 Points in MexDer during the period between the 16th day of the previous month and the 15th day of the measurement month, will be entitled to 40 basis points. On the other hand, Market Makers and Aspiring Market Makers who throughout the aforementioned measurement period have obtained the highest scores, will receive additional points in accordance with the following table: Rank in Measurement Incentive (bp) First place 30bp Second place 20bp Third place 10bp In case of a tie, priority will be given to Market Makers with the higher volume of Operations in MexDer during that measurement period. MexDer will report to the Bank of Mexico within two business days following the 15th day of the measurement period the number of Points in MexDer obtained by each of the Market Makers and Aspiring Market Makers. IV. Incentives for Operations in MexDer The volume of Operations in MexDer (OM) will be calculated based on the number of contracts traded and for intermediary j is defined by: OMj Number of futures contracts with a government value as underlying, bought and sold in MexDer, arranged through any means, by intermediary j, including 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 intermediary j is calculated as: OMj = sBj + 0.15 ∙ sej where: sBj Total number of futures contracts with BONOS as underlying operated by intermediary j. sej: Total number of futures contracts with CETES as underlying operated by intermediary j. Market Makers and Aspiring Market Makers who meet the requirement of a minimum daily average of 500 Points in MexDer and have an OM greater than or equal to 40,000 contracts during the aforementioned measurement period, will receive an additional 30 basis points. V. Incentives or penalties for Positions in Bonds and CETES (IP MBI ) The incentives and penalties will consider positions presented between the 16th day of the previous month and the 15th day of the measurement month, in accordance with the following formula: IP MBI = 97% ∗ PP M + 3% ∗ PP BI Where: IP MBI Whole basis points. PP M Points for eligible positions in Bonds. PP BI Points for eligible positions in CETES. The indicator P M is defined based on the following: 1 if M i,j ≥ 20,000,000 0 if M i,j < 20,000,000 Where M i,j represents the total nominal amount of Eligible Positions entered by each Market Maker in the Bond issuance i for day j. Then, the percentage of Bond issuances that meet a nominal amount in Eligible Positions greater than 20 million on a particular day j will be: PE M = ∑ P i,j M / ev M Where ev M denotes the number of active Bond issuances on day j. Afterwards, the average of the percentage of issuances that each day meet a nominal amount in Eligible Positions greater than 20 million pesos will be calculated as follows: PEP M = ∑ P E M / dp Where dp represents the number of business days in the Measurement Period for incentives and penalties for positions. Then, according to the level of PEP M, the following points for Eligible Positions in Bonds (PP M) will be assigned:

Average percentage of issuances that each day meet a nominal amount in Eligible Positions greater than 20 million pesos (PEP M) Points for positions in Bonds (PP M) [90%, 100%] 90 bp [80%, 90%) 60 bp [70%, 80%) 30 bp [60%, 70%) 0 bp [0%, 60%) -30 bp

b) Points for eligible positions in CETES (PP BI ) M BI is defined as the total nominal amount of Eligible Positions entered for all active CETES issuances on a particular day j and dp as the number of business days in the Measurement Period for incentives and penalties for positions; then, the daily average nominal amount in Eligible Positions will be calculated as follows: MP BI = ∑ M BI j / dp Then, according to the level of MP BI, the following points for Eligible Positions in CETES (PP BI) will be assigned: Daily average nominal amount in Eligible Positions (millions of pesos) (MP BI) Points for positions in CETES (PP BI) ≥3,000 90 bp [2,000, 3,000) 60 bp [1,000, 2,000) 30 bp [500, 1,000) 0 bp < 500 -30 bp For such purposes, only those quotes that have been presented in the schedules specified by the Secretariat in terms of section 3.2, have been reported by the Trading Platforms to the Bank of Mexico in terms of section 2.3 of this Office, no later than two Business Days after the close of the measurement period in question, and are located in one of the following situations: a) They have resulted in the execution of an operation, regardless of the amount or the time they remained on the screens of the Trading Platforms. b) They have not resulted in the execution of an operation, provided that: (i) they have remained on the screens of the Trading Platforms for at least one minute, and (ii) each position individually is equal to or greater than: a) in the case of CETES, $100,000,000.00 (ONE HUNDRED MILLION PESOS 00/100 M.N.), or b) in the case of BONOS, $10,000,000.00 (TEN MILLION PESOS 00/100 M.N.).”

Annex 2 Calculation of the UDIBONOS Market Maker Index The UDIBONOS Market Maker Index (IFMU) is the sum of the UDIBONOS Activity Index (IAU) plus incentives minus incentives and penalties for Positions in UDIBONOS (IPU), plus other incentives and penalties that, according to section 4.3 of this Office, the Secretariat determines. The IFMU will be the result of the following formula: IFMU = IAU + incentives – penalties The calculation methodology for the IAU is described below: I. IAU It is calculated as the market participation in the nominal volume traded directly in UDIBONOS expressed in UDIS weighted by duration, of each UDIBONOS Market Maker (FMU). The IAU for participant j is defined by: IAUj Market participation of FMU j in the nominal volume traded in UDIBONOS in all considered segments, for the measurement period defined in section 2.4 of this Office. To consider the risk of trading issuances of different terms, the nominal volume will be multiplied by the duration of the instrument. The Bank of Mexico may exclude from the calculation the operations referred to in section 2.3 of this Office. The IAU for FMU j is obtained as follows: IAUj = 0.35 ∙ Vj Primary + 0.40 ∙ Vj Clients + 0.25∙ Vj Brokers Vj Primary Market participation of intermediary j in the total volume traded in the primary market (Primary). Vj Clients Market participation of intermediary j in the total volume traded with clients other than banks or brokerage houses through any means (Clients). Vj Brokers Market participation of intermediary j in the total volume traded with banks or brokerage houses through Trading Platforms (Brokers). where: Vj K Market participation of intermediary in the volume traded in segment K which can be Primary, Clients or Brokers. Vj K = ∑ (M j,i,k * di) / ∑ (MT k * di) M k Nominal amount traded by intermediary j in segment K and in instrument i. For the case of the Primary segment, it represents the nominal amount assigned in the primary auction during the measurement period defined in section 2.4 of this Office. MT k Total nominal amount traded by all intermediaries in segment k and in instrument i. For the case of the Primary segment, it represents the nominal amount assigned in the primary auction during the measurement period defined in section 2.4 of this Office. di Duration expressed in years of the issuance of instrument i (UDIBONO) calculated for the settlement day of each operation. E Is the number of active issuances.

II. Incentives or penalties for Positions in UDIBONOS (IP S ) The incentives and penalties will consider positions presented between the 16th day of the previous month and the 15th day of the measurement month, in accordance with the following formula: The indicator P S is defined based on the following: 1 if M S ≥ 20,000,000 0 if M S < 20,000,000 Where M S represents the total nominal amount of Eligible Positions entered by each UDIBONOS Market Maker in the UDIBONOS issuance i for day j. Then, the percentage of UDIBONOS issuances that meet a nominal amount in Eligible Positions greater than 20 million on a particular day j will be: PE S = ∑ P i,j S / ev S Where ev S denotes the number of active UDIBONOS issuances on day j. Afterwards, the average of the percentage of issuances that each day meet a nominal amount in Eligible Positions greater than 20 million pesos will be calculated as follows: PEP S = ∑ P E S / dp Where dp represents the number of business days in the Measurement Period for incentives and penalties for positions. Then, according to the level of PEP S, the following Incentives and Penalties for UDIBONOS (IP S) will be assigned: Average percentage of issuances that each day meet a nominal amount in Eligible Positions greater than 20 million pesos (PEP S) Incentives and Penalties for Udibonos (IP S) [90%, 100%] 90 bp [80%, 90%) 60 bp [70%, 80%) 30 bp [60%, 70%) 0 bp [0%, 60%) -30 bp For such purposes, only those quotes that have been presented in the schedules specified by the Secretariat in terms of section 3.2, have been reported by the Trading Platforms to the Bank of Mexico in terms of section 2.3 of this Office no later than two Business Days after the close of the period in question, and are located in one of the following situations: a) They have resulted in the execution of an operation, regardless of the amount or the time they remained on the screens of the Trading Platforms. b) They have not resulted in the execution of an operation, provided that: (i) they have remained on the screens of the Trading Platforms for at least one minute, and (ii) each position individually is equal to or greater than $10,000,000.00 (TEN MILLION PESOS 00/100 M.N.).”

Annex 3 Procedure for the Allocation of Call Option for BONOS, CETES and UDIBONOS If the aggregate demand of all Market Makers and UDIBONOS Market Makers (Market Maker) through the exercise of this call option for BONOS, CETES and UDIBONOS results in greater than 25% of the total amount assigned to each of the Auctions, the following procedure will be followed. Definitions: S i Amount requested by Market Maker i, i=1, 2, 3,..., n, for the exercise of the call option. V 25% of the total amount assigned in the Auction. X Percentage of the amount of computable positions defined in section 4.1.2 of this Office presented in the Auction by Market Maker i with respect to the sum of the computable positions presented by the Market Makers who wish to exercise the call option. Y Percentage of the amount requested by Market Maker i for the exercise of the call option with respect to the total amount requested by the set of Market Makers. Let, We have two possible cases:

1. If X ≤ V, then each Market Maker i receives S i,
2. If X > V, then, 1st step: Market Maker i receives S i; Let R = V - ∑ S i (for those who received S i); If R > 0, 2nd step: Market Maker i receives R * (S i / ∑ S i remaining); Let R' = R - ∑ (R * (S i / ∑ S i remaining)); If R' > 0, 3rd step: those Market Makers i who received as allocation the requested amount, i.e., S i, are eliminated from the calculation. For the rest of the Market Makers, the available amount R' will be prorated as follows: Allocation = R' * (S i / ∑ S i remaining) With which the final allocation of Market Maker i will be S i + Allocation.”

Friday, January 5, 2018 OFFICIAL GAZETTE (First Section) 117

“Annex 4 Quantification and Collection of the Premium for the Lending of Securities to Market Makers and UDIBONOS Market Makers by the Bank of Mexico

The premium that each Market Maker j or UDIBONOS Market Maker j (Market Maker j) will pay to the Bank of Mexico for each lending operation of CETES, BONOS, or UDIBONOS, as applicable, that they carry out, will be obtained by multiplying: (i) a factor α*j, by (ii) the weighted government funding rate that the Bank of Mexico calculates and publishes daily through its website www.banxico.org.mx or through any other electronic, computing, or telecommunications medium authorized for this purpose by said Bank, corresponding to the second Business Day prior to the date on which the respective premium must be paid to said Bank and (iii) the result of items (i) and (ii) will be divided by 360.

The premium for each Market Maker will be:

This premium may be reduced based on the operability in the repo and lending markets for CETES, BONOS, or UDIBONOS of each Market Maker or UDIBONOS Market Maker, as applicable. For this purpose, the activity in these markets will be calculated taking into account a monthly measurement period, in accordance with what is established in section 4.2.6 of this Office Order and according to the term and counterparty of the operations. In the event that the operations are carried out with entities belonging to the same financial group, these will not be considered as part of the operation for the calculation of the factor. In the repo market, the amount of the operations carried out each day will be used, while for the calculation of activity in the securities lending market, the measurement will be based on the amount of outstanding operations. Only operations with repos and lending involving CETES, BONOS, or UDIBONOS, as applicable, will be considered.

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

where,

α*j Factor on the government funding rate to determine the premium for loans for Market Maker j. α Factor that indicates the maximum value that can be taken. Initially this factor will be equal to 0.07. ω Discount factor, ω ∈[0, α]. Initially this factor will be equal to 0.04. Rj Average daily amount of the forward repo operation contracted by Market Maker j during the measurement period. Pj Average daily balance during the measurement period of the securities loans of Market Maker j. λj .

118 (First Section) OFFICIAL GAZETTE Friday, January 5, 2018

Vj Average daily outstanding balance of the securities lending window exercised by Market Maker j during the measurement period.

In the event that the average daily balance of the securities lending window exercised by Market Maker j during the measurement period is equal to zero, α*j will be equal to 3%.

Forward repo operations will be quantified as follows:

where,

R1tj Nominal amount of repos contracted on day t with a term of 11 to 20 days by Market Maker j. R2tj Nominal amount of repos contracted on day t with a term of 21 to 30 days by Market Maker j. R3tj Nominal amount of repos contracted on day t with a term greater than 30 days by Market Maker j. N Number of Business Days t of the measurement period.

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

where,

Ptj Nominal amount of the outstanding loan balance on day t of the measurement period of Market Maker j. N Number of Business Days t of the measurement month.

The collection of the premium Cj can be divided into two parts:

where:

Premium that will be charged to each Market Maker j. Part A of the premium that will be charged to each Market Maker j. Part B of the premium that will be charged to each Market Maker j.

a) Part A of the premium will be charged at the maturity of each securities lending operation in the account that Indeval maintains for each Market Maker j, and will be determined based on the following formula:

where:

Part A of the premium.

Friday, January 5, 2018 OFFICIAL GAZETTE (First Section) 119

Factor to determine the part of the premium that will be charged in the Indeval account. The Bank of Mexico, in its capacity as financial agent of the Federal Government, will inform Market Makers and UDIBONOS Market Makers of the value of this factor through the medium it deems appropriate.

The maximum value that this factor can take will be equal to .

Weighted government funding rate, which the Bank of Mexico calculates and publishes daily through its website www.banxico.org.mx or through any other electronic, computing, or telecommunications medium authorized for this purpose by said Bank.

b) Part B of the premium will be determined by the Bank of Mexico, in its capacity as financial agent of the Federal Government, as the difference between the total calculated premium less Part A of the premium and will be charged no later than the business day following the maturity of each securities lending operation. This charge will be made through the medium that the Bank of Mexico will inform Market Makers and UDIBONOS Market Makers at least three Business Days in advance of the date on which the charge must begin in the corresponding medium.”

Annex 5 Quantification and Collection of the Premium for the Lending of Securities to UDIBONOS Market Makers by the Bank of Mexico

Repealed.

TRANSITORY PROVISIONS

FIRST.- The provisions of this Office Order will enter into force on the Business Day following its publication in the Official Gazette of the Federation, except for what is provided in the following transitory articles.

SECOND.- Credit institutions and brokerage houses that before the entry into force of this Office Order have the status of Market Maker will not need to submit their application to the Public Credit Unit in which they manifest their interest in being Applicants for UDIBONOS Market Maker.

THIRD.- Credit institutions and brokerage houses that act as Market Makers or UDIBONOS Market Makers at the entry into force of this Office Order must submit to the PCU, at the address indicated in the first paragraph of section 2.1, no later than the Business Day following the publication in the Official Gazette of the Federation of this Office Order, a declaration of commitment by which they formalize their determination to carry out their activities in terms of the guidelines established in the Code of Conduct, in a format substantially equal to that provided in annex 1 of the Code of Conduct.

Credit institutions and brokerage houses that, prior to the entry into force of this Office Order, have submitted their application to act as Market Makers, must submit to the PCU, at the address indicated in the first paragraph of section 2.1, no later than April 1, 2018, the declaration of commitment referred to in the previous paragraph.

FOURTH.- The modifications to section 2.5, item a), and 4.1.2 of this Office Order, will enter into force on March 1, 2018.

FIFTH.- The modifications to section 4.2.3 of this Office Order, will enter into force on February 1, 2018.

SIXTH.- The modifications to section 3.2, as well as fraction V of Annex 1 and fraction II of Annex 2, of this Office Order regarding the incentives and penalties applicable to quotes presented through Trading Platforms and Negotiation Systems with Clients, will enter into force on March 16, 2018.

SEVENTH.- Credit institutions and brokerage houses that before the entry into force of this Office Order have the status of Market Maker and have celebrated the contract to carry out securities lending operations with the Bank of Mexico, will not need to celebrate a new contract in the event that they acquire the status of UDIBONOS Market Maker.