Circular 28/2020 — Modifies Circular 3/2012 (Interest Rate for Open Market Operations)

Wednesday, July 15, 2020 OFFICIAL GAZETTE 1 BANCO DE MEXICO CIRCULAR 28/2020 addressed to credit institutions, regulated multiple-object financial societies that maintain equity links with credit institutions, and the National Agricultural, Rural, Forestry and Fisheries Development Financial Institution regarding modifications to Circular 3/2012 (Interest Rate for Open Market Operations).

A logo appears at the margin, stating: Bank of Mexico.- "2020, Year of Leona Vicario, Meritorious Mother of the Fatherland". CIRCULAR 28/2020 TO CREDIT INSTITUTIONS, REGULATED MULTIPLE-OBJECT FINANCIAL SOCIETIES THAT MAINTAIN EQUITY LINKS WITH CREDIT INSTITUTIONS, AND THE NATIONAL AGRICULTURAL, RURAL, FORESTRY AND FISHERIES DEVELOPMENT FINANCIAL INSTITUTION: SUBJECT: MODIFICATIONS TO CIRCULAR 3/2012 (INTEREST RATE FOR OPEN MARKET OPERATIONS).

The Bank of Mexico, with the purpose of continuing to promote the sound development of the financial system and ensuring its stability, considers it necessary to maintain adequate liquidity administration to ensure the effectiveness of monetary policy implementation. Therefore, it has determined that the interest rates corresponding to deposit and liquidity operations subject to auctions conducted by the Central Bank, in accordance with the "Applicable Provisions for the Operations of Credit Institutions, Regulated Multiple-Object Financial Societies that Maintain Equity Links with Credit Institutions, and the National Agricultural, Rural, Forestry and Fisheries Development Financial Institution," issued by this Central Institute through Circular 3/2012, known as open market operations, shall be adjusted to the movements of the monetary policy target rate determined by the Governing Board of the Bank of Mexico itself. Thus, credit institutions participating in open market operations will have certainty that, at all times, the interest rate applicable to the amounts they must pay or receive by virtue of these operations will be consistent with the level of the monetary policy target rate observed during the validity of said operations. This will generate more incentives for credit institutions to participate in them and, in turn, facilitate the liquidity administration that the Bank of Mexico carries out daily.

For the above reason, based on Articles 28, sixth and seventh paragraphs, of the Political Constitution of the United Mexican States; 24 and 26 of the Bank of Mexico Law; 87-D, fourth paragraph, of the General Law of Organizations and Auxiliary Credit Activities; 48 of the Credit Institutions Law; 22 of the Law for Transparency and Ordering of Financial Services; 4, first paragraph, 8, fourth and eighth paragraphs, 10, first paragraph, 12 Bis, first paragraph, in relation to 20 Quater, fraction IV, 14 Bis, first paragraph, in relation to 17, fraction I, 14 Bis 1, first paragraph, in relation to 25 Bis 1, fraction IV, and 19 Bis 1, fraction XI, of the Internal Regulations of the Bank of Mexico, which grant it the authority to issue provisions through the General Directorate of Payment Systems and Market Infrastructures, the General Legal Directorate, the General Directorate of Financial System Affairs, and the Operations Support Directorate, respectively; as well as Article Two, fractions I, VI, X, and XVII, of the Agreement on the Affiliation of Administrative Units of the Bank of Mexico, it has resolved to modify Articles 177, fraction III; 184; 186; 187; 188, second paragraph; 189, fractions IV, fourth paragraph, and VI; 192, last paragraph; 194; and 195 Bis 4, fractions I, second paragraph, and II, second paragraph; and to add a second paragraph to fraction V, fraction V Bis, as well as a third and fourth paragraph, renumbering the current third, fourth, and fifth paragraphs, of Article 188; as well as fractions VI Bis and VI Ter to Article 189, of the Applicable Provisions for the Operations of Credit Institutions, Regulated Multiple-Object Financial Societies that Maintain Equity Links with Credit Institutions, and the National Agricultural, Rural, Forestry and Fisheries Development Financial Institution, contained in Circular 3/2012, to read as follows:

2 OFFICIAL GAZETTE Wednesday, July 15, 2020 APPLICABLE PROVISIONS FOR THE OPERATIONS OF CREDIT INSTITUTIONS, REGULATED MULTIPLE-OBJECT FINANCIAL SOCIETIES THAT MAINTAIN EQUITY LINKS WITH CREDIT INSTITUTIONS, AND THE NATIONAL AGRICULTURAL, RURAL, FORESTRY AND FISHERIES DEVELOPMENT FINANCIAL INSTITUTION General Characteristics Article 177.- … I. and II. … “III. The rates referred to in the bids shall be expressed in annual percentage points and rounded to hundredths.” Authority of the Bank of Mexico to declare an auction void or reject bids “Article 184.- The Bank of Mexico reserves the right to declare the respective auction void or reject bids when it considers that they do not adequately represent market conditions, could produce undesirable effects in the market, or go against sound market practices.” Schedules “Article 186.- The Bank of Mexico will carry out the relevant procedures to formalize assignments for each Liquidity Auction, provided that the applicable conditions are met, within the schedules defined in the SAGAPL manual, which can be consulted through SAGAPL.” Order of formalization “Article 187.- For each Liquidity Auction, participant, and assigned amount, the order in which the Bank of Mexico will carry out the relevant procedures to formalize each operation shall be as follows: I. and II. … In all cases, for each assigned bid, the relevant procedures will be carried out to formalize first through credit operations and, if necessary, through repos.” Characteristics of credits Article 188.- … I. to IV. V. “Interest Rate: The rate corresponding to the assigned bid. In the event that, from the Banking Business Day of the execution of the credit until the agreed maturity date, the one-day interbank interest rate that the Governing Board of the Bank of Mexico has determined as the target rate for monetary policy purposes is modified by decision of said Board, the interest rate referred to in the previous paragraph shall be adjusted by the same number of basis points by which said target rate has been modified, for each of the Days from that on which the new rate is applicable until the agreed maturity date of the credit term. Each time the referred target rate is modified, if applicable, during the validity of the credit, the applicable interest rate shall be adjusted in accordance with the provisions of this paragraph; V Bis. Interest: The amount that the Institution must pay at the expiration of the credit operation term, calculated based on the sum of the amounts resulting from multiplying, during all Days of the validity of the said credit operation, the principal amount of the credit operation corresponding to that Day, by the interest rate applicable to that Day in accordance with the provisions of the previous fraction, divided by 360; VI. and VII. … The deposits mentioned in fraction VI must be previously allocated for this purpose by the accredited Institution. In any case, the amount of the deposits must cover both the principal and the estimated interest that the credit will accrue, and its maturity term must be longer than the term of the credit they guarantee. For the case provided in the previous paragraph, the estimated interest shall be calculated as follows: For each Day of the validity of the credit, the estimated interest will be calculated taking into account the interest rate referred to in the previous fraction V, assuming for the purposes of said calculation that the target interest rate indicated in said fraction will remain constant during the remaining term of the credit.

Wednesday, July 15, 2020 OFFICIAL GAZETTE 3 Additionally, in the event that, from the Banking Business Day of the execution of the credit until the agreed maturity date for said credit, the referred target interest rate is modified by decision of the Governing Board of the Bank of Mexico, the change in basis points on the value of said rate will be considered to make the pertinent modifications to the interest rate mentioned in fraction V of this article, and the adjusted value of said rate will be taken as the applicable one for each of the Days from that on which the new target rate is in effect until the agreed maturity date of the credit term. Without prejudice to the foregoing, the interest that the Institution in question must pay to the Bank of Mexico will be that resulting from the calculation performed at the expiration of the credit term, in accordance with the provisions of fraction V Bis of this article.” … Characteristics of repos Article 189.- … I. to III. … IV. “Securities subject to the repo: … … … Likewise, the value of the securities subject to the repo determined in accordance with the provisions in the following paragraph, must be equal to or greater than the sum of the price plus the estimated premium of the operation calculated in accordance with the following fraction VI Ter. … V. … VI. Premium: The amount that the Institution must pay at the expiration of the repo operation term, calculated based on the sum of the amounts resulting from multiplying, during all Days of the validity of the said repo operation, the repo price by the interest rate applicable to that Day in accordance with the provisions of the following fraction VI Bis, divided by 360. VI Bis. Interest Rate: The rate corresponding to the bid assigned to each Institution. In the event that, from the Banking Business Day of the perfection of the repo until the agreed expiration date of the repo term, the one-day interbank interest rate that the Governing Board of the Bank of Mexico has determined as the target rate for monetary policy purposes is modified by decision of said Board, the interest rate referred to in the previous paragraph shall be adjusted by the same number of basis points by which said target rate has been modified, for each of the Days from that on which the new rate is applicable until the agreed expiration date of the repo term. Each time the referred target rate is modified, if applicable, during the validity of the repo, the applicable interest rate shall be adjusted in accordance with the provisions of this paragraph. VI Ter. Estimated Premium: For each Day of the validity of the repo, the Estimated Premium will be calculated taking into account the interest rate referred to in the previous fraction VI Bis, assuming for the purposes of this calculation that the target interest rate indicated in said fraction will remain constant during the remaining term of the repo operation. Additionally, in the event that, from the Banking Business Day of the perfection of the repo until the agreed expiration date of the repo term, the referred target interest rate is modified by decision of the Governing Board of the Bank of Mexico, the interest rate applicable to the calculation of the Estimated Premium shall be adjusted by the same number of basis points by which said target rate has been modified, for each of the Days from that on which the new target rate is applicable until the agreed expiration date of the repo term. Each time the referred target rate is modified, if applicable, during the validity of the repo, the applicable interest rate shall be adjusted in accordance with the provisions of this paragraph. Without prejudice to the foregoing, the Premium that the accredited Institution must pay to the Bank of Mexico will be that resulting from the calculation performed in accordance with fraction VI.” VII. … … Formalization of assignments in Deposit Auctions

4 OFFICIAL GAZETTE Wednesday, July 15, 2020 Article 192.- … … … “At the maturity date of each of the deposits, the Bank of Mexico will make the credit for the principal amount and interest of the corresponding deposit in the Unique Account of the Institution that made said deposit, which will cease to guarantee overdrafts in the Unique Account of the Institution. For these purposes, in the event that, from the Banking Business Day of the constitution of the deposit until the agreed expiration date of said deposit term, the one-day interbank interest rate that the Governing Board of the Bank of Mexico has determined as the target rate for monetary policy purposes is modified by decision of said Board, the interest rate assigned to the corresponding Deposit Auction for each Institution shall be adjusted by the same number of basis points by which said target rate has been modified, for each of the Days from that on which the new rate is applicable until the agreed expiration date of the deposit term. Each time the referred target rate is modified, if applicable, during the validity of the deposit, the applicable interest rate shall be adjusted in accordance with the provisions of this paragraph.” Suspension or limit of Liquidity Auctions and Deposit Auctions “Article 194.- The Bank of Mexico may suspend the participation of Institutions in Liquidity Auctions when: I. and II. … … Likewise, when Institutions have acted in Liquidity Auctions or Deposit Auctions against sound market uses or practices, or their operations do not comply with them, the Bank of Mexico may suspend or limit the participation of one or more of them in Liquidity Auctions or Deposit Auctions.” Determination of the value of Special Guarantees that Institutions must constitute Article 195 Bis 4.- … I. … “The difference between (i) the value in Mexican pesos of the Dollar Deposits delivered in pledge in the credit operation celebrated by the Institution in question in terms of Articles 154 or 188 of these Provisions, at the exchange rate published by the Bank of Mexico in the Official Gazette of the Federation on the day of the corresponding valuation, applying the discount factor that will be announced through SAGAPL, taking as a basis the procedure described in the referred articles, and (ii) the sum of the principal of said credit plus the interest that the credit provided for in Article 154 cited will accrue over its validity, including accrued interest, or the estimated interest corresponding to the credit referred to in Article 188 cited. II. … The difference between (i) the value in Mexican pesos of the securities granted in stock pledge and the securities subject to the repo celebrated by the Institution in question in terms of Articles 155 or 189 of these Provisions, taking as a basis the procedure described in Annex 7. The referred value will be calculated applying the prices and discount factors that will be announced through SAGAPL on the day of the corresponding valuation, and (ii) the sum of the price plus the premium or estimated premium, as applicable, of the repo in question.” … TRANSITORY SOLE.- This Circular will enter into force on the day of its publication in the Official Gazette of the Federation. Operations referred to in the articles modified by this Circular that Institutions have celebrated prior to the date indicated in the previous paragraph and that remain in effect on that date will be subject to the terms applicable to them on the Banking Business Day prior to that same date.

Wednesday, July 15, 2020 OFFICIAL GAZETTE 5 Mexico City, July 7, 2020.- BANK OF MEXICO: The General Director of Payment Systems and Market Infrastructures, Manuel Miguel Ángel Díaz Díaz.- Signature.- The General Legal Director, Luis Urrutia Corral.- Signature.- The General Director of Financial System Affairs, José Luis Negrín Muñoz.- Signature.- The Operations Support Director, Joaquín Rodrigo Cano Jauregui Segura Millan.- Signature. For any queries regarding the content of this Circular, the Bank of Mexico is at your disposal through the Directorate of Central Bank Authorizations and Sanctions at telephone (55) 5237-2000 extension 3200.