Circular 29/2020 — Modifies Circular 18/2020 regarding repo operations with Bank of Mexico

Thursday, July 23, 2020 OFFICIAL GAZETTE 13 BANK OF MEXICO CIRCULAR 29/2020 addressed to Multiple Banking and Development Banking institutions, regarding the modifications to the Rules applicable to corporate title repo operations with the Bank of Mexico to cover liquidity needs.

A logo appears at the margin, stating: Bank of Mexico.- "2020, Year of Leona Vicario, Meritorious Mother of the Fatherland".

CIRCULAR 29/2020 TO MULTIPLE BANKING AND DEVELOPMENT BANKING INSTITUTIONS: SUBJECT: MODIFICATIONS TO THE RULES APPLICABLE TO CORPORATE TITLE REPO OPERATIONS WITH THE BANK OF MEXICO TO COVER LIQUIDITY NEEDS

The Bank of Mexico, considering that, on the one hand, the corporate debt market of our country faces an environment derived from the COVID-19 pandemic in which conditions of caution in financial markets and the perception of higher credit risk continue to prevail, the operating conditions of the fixed income market remain stressed and the primary corporate debt market has been limited by the conditions of uncertainty and risk caused by the aforementioned pandemic and that, on the other hand, a decrease in the operability and liquidity in the secondary market for long-term corporate debt continues to be observed, has resolved that it is convenient to expand the scope, as well as reduce the cost of the operations that credit institutions can carry out with the Central Bank under the "Rules applicable to corporate title operations with the Bank of Mexico to cover liquidity needs", issued through Circular 18/2020, published in the Official Gazette of the Federation on May 19, 2020, with the aim that, through said operations, the primary placement of national corporate debt can be favored and, in this way, reactivate a fundamental channel for granting credit in the economy, as well as generate the additional benefits derived from greater dynamism in the debt market. Under these circumstances, the foregoing could be achieved through the celebration of three-month repos subject to renewal with recently issued corporate debt titles, which are placed in the market within an extended period until December 31, 2020.

For the above, based on articles 25, second paragraph, 28, sixth and seventh paragraphs, of the Political Constitution of the United Mexican States, 7, fractions I, II and X, 8, 14, first paragraph, 15, 16, 24, 26, first paragraph, and 36, of the Bank of Mexico Law, 53, 54, 81 and 96 Bis, 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, 14, first paragraph, in relation to 25, fraction VII, 14 Bis, first paragraph, in relation to 17, fraction I, 14 Bis 1, in relation to 25 Bis 1, fraction IV, and 19 Bis 1, fractions I and XI, of the Internal Regulations of the Bank of Mexico, which grant it the authority to issue provisions through the General Directorate of Financial Stability, the General Legal Directorate, the General Directorate of Affairs of the Financial System and the Operations Support Directorate, respectively, as well as Second, fractions I, IV, VI and X, of the Agreement on the Assignment of Administrative Units of the Bank of Mexico, has resolved to add a first paragraph to section 2.1, a section titled "Permitted Extensions and Renewals", immediately after the section "Term for the celebration of the repo operation", of section 2.2., and a First Bis Transitory, as well as modify the definition of "Eligible Currency" in section 1, the first and third paragraphs of section 2.1, the sections "Repo Party", "Titles subject to the repo", subsection i) and last paragraph, "Interest Rate" and "Valuation of titles subject to the repo", third paragraph, of section 2.2, the fourth paragraph of section 3.2 and Annexes 1 and 2, and the First Transitory, of the "Rules Applicable to Corporate Title Repo Operations with the Bank of Mexico to Cover Liquidity Needs" issued through Circular 18/2020, to remain in the following terms:

14 OFFICIAL GAZETTE Thursday, July 23, 2020 RULES APPLICABLE TO CORPORATE TITLE REPO OPERATIONS WITH THE BANK OF MEXICO TO COVER LIQUIDITY NEEDS

"1. Definitions. ... ... ... ... ... Eligible Currency: the Australian Commonwealth dollar, Canadian dollar, United States of America dollar, New Zealand dollar, euro of the corresponding countries of the European Union, British pound of the United Kingdom of Great Britain and Northern Ireland and Japanese yen. ... ... ... ... ... ... ... ..."

"2. General terms and conditions. 2.1 Conditions for granting financing. Institutions may directly, on their own account, carry out repo operations with the Bank of Mexico, under the terms established in these Rules. Likewise, Institutions may carry out, on behalf of third parties, the repo operations referred to in these Rules, only when these are brokerage houses, investment funds or, in their case, specialized investment societies for retirement funds, subject to having sufficient powers to carry out such operations. Institutions that, in compliance with mandates, commissions or administration mandates, carry out the repos on behalf of third parties referred to in these Rules must observe the applicable provisions to this respect, including those corresponding to the "Rules to which credit institutions; brokerage houses; insurance institutions; guarantee institutions, limited object financial societies and Rural Finance must be subject, in trust operations", issued by the Bank of Mexico through Circular 1/2005, published in the Official Gazette of the Federation on June 23, 2005, in terms of the modifications made subsequently.

Institutions interested in carrying out, in their capacity as repo parties, the repo operations with the Bank of Mexico in accordance with these Rules must present their requests on the date and within the hours indicated in the calls that the latter will make known to them for these effects. In said requests, the Institution in question must indicate whether it acts on its own account or if it acts on behalf of any of the third parties referred to in the previous paragraph and, in the latter case, it must indicate the full name of the brokerage house, investment fund or specialized investment society for retirement funds, in the name and on behalf of whom the Institution requests to carry out the corresponding repo operations. The Bank of Mexico will make known to the Institutions each of the aforementioned calls, at least two Banking Business Days in advance of the date on which it will receive the indicated requests. ... The Institutions must present, through SIAC-BANXICO, the aforementioned requests on the date and time indicated in the respective call. The access, identification and, in their case, operation keys, established for the use of SIAC-BANXICO will substitute the autograph signature of the representative of the Institution in question with one of an electronic nature, so that the documentary or technical records generated or presented as a result of the use of said data will produce the same effects that the laws grant to documents signed by the parties and, consequently, will have equal probative value. Likewise, in case that the Institutions intend to carry out the referred repos with titles that have been issued by other multiple banking institutions, in accordance with what is contemplated in section 2.2 below, these must, within a period not less than two Banking Business Days prior to that established in the respective call for the receipt of the indicated requests, specify said titles and their characteristics in the

Thursday, July 23, 2020 OFFICIAL GAZETTE 15 the title registration system that, for this purpose, is established in the Manual, in terms of what is stipulated in the respective contract. ... ... ... ..."

"2.2 Repo operations. ... ... Repo Party: The Institution that meets the requirements to carry out repos with the Bank of Mexico in accordance with these Rules, on its own account or on behalf of any of the third parties referred to in section 2.1 above. ... ... Permitted Extensions and Renewals: The repo that is celebrated for the first time, in accordance with what is indicated in the section "Term for the celebration of the repo operation" of this section 2.2, may be extended or renewed, on one or more occasions, at the request of the repo Institution, for terms and characteristics equal to those of said repo, provided that said original repo was celebrated by the Institution, on its own account or on behalf of any of the third parties referred to in section 2.1 above, with titles provided for in this section 2.2 that have only been issued, in national currency or in UDIS, between July 16, 2020 and until December 31, 2020 and update any of the following circumstances: i) The individual holding of said titles, by the Institution or by the third party on whose behalf it has celebrated the repo, represents, at the time of its primary placement, a percentage of the sum of the nominal value of all titles of the same series that have remained placed not less than five percent (5%) and not more than ten percent (10%) of said nominal value, provided that it does not exceed the equivalent to 75 million UDIS. In the case of this subsection, the Institution may extend or renew the repo operations on one or more occasions, provided that its perfection takes place until December 31, 2021. ii) The individual holding of said titles, by the Institution or by the third party on whose behalf it has celebrated the repo, represents, at the time of its primary placement: (a) a percentage greater than ten percent (10%) of the sum of the nominal value of all titles of the same series that have remained placed or (b) an amount greater than the equivalent to 75 million UDIS. In the case of this subsection, the Institution may extend or renew the repo operations on one or more occasions, provided that its perfection takes place until June 30, 2023. In the circumstances contemplated in subsections i) and ii) above, the Institution may request its extension or renewal from the Bank of Mexico on the second Banking Business Day immediately prior to that on which the repo subject to the extension or renewal expires, within the hours established for this purpose in the Manual. Additionally, the renewal of the repo operations that the Institution requests subject to the terms and periods established in subsections i) and ii) above, may be carried out on one or more occasions, provided that it is carried out simultaneously on the expiration date of the previous repo operation and the respective perfection takes place before the dates indicated for this purpose in those same subsections. Regarding repos celebrated with titles issued by multiple banking institutions, these may only be extended or renewed in terms of subsections i) or ii) above, in case that the expiration of said titles occurs at the end of a period greater than one year from their date of issuance. Repos that Institutions celebrate with the titles indicated in subsections i) or ii) above may not exceed the lesser amount between: (a) the equivalent to twenty percent (20%) of the sum of the nominal amount of all those titles of the same series that have remained placed in primary placement or (b) the equivalent to 150 million UDIS. To perform the calculation in UDIS of the limits indicated in subsections i) and ii) above, Institutions must take the value of said unit of account from the Banking Business Day on which the request is presented. Titles subject to the repo: ... i) Private legal persons resident in Mexico, whether financial or non-financial, that do not form part of the same financial group, business group or consortium to which the repo Institution belongs, or ii) ... ...

16 OFFICIAL GAZETTE Thursday, July 23, 2020 a) ... b) ... c) ... ... ... ... ... ... ... ... ... In any case, the Bank of Mexico, in attention to the date of issuance and placement of the titles and to the depth and conditions prevailing in the market in which said titles are negotiated, may not accept these titles in repo operations, as well as those that do not have an updated valuation at market prices, that have not remained placed among several investors or that have not been placed through public offer. Likewise, the Bank of Mexico will not accept titles issued by multiple banking institutions in those repo operations that have been requested by other multiple banking institutions, acting on their own account or on behalf of any of the third parties referred to in section 2.1 above, in case that, as a result of the respective repos, triangulations of the corresponding resources between said repo Institutions or the third parties on whose behalf the repos are celebrated and the issuers of the referred titles can be carried out, so that said institutions or third parties carry out reciprocal operations with the issuers mentioned with the resources of the repos they intend to celebrate in accordance with these Rules, with the intention of generating between said repo Institutions or the third parties and the issuers a benefit that departs from sound banking practices. For the case of titles denominated in Eligible Currencies, the Bank of Mexico may not accept those with which it is not able to carry out the corresponding operations within the period to perfect the respective repo. ... ... ... ... Interest Rate: will be equivalent to the result of multiplying the factor of 1.03 (one point zero three) by the average, during the Term of the repo, of the one-day interbank interest rate that the Government Board of the Bank of Mexico has determined as the target rate for monetary policy purposes, expressed annually and in percent with rounding to two decimals, made known on the internet electronic page of the Bank itself during each day of the validity of the repo. ... ... ... ... ... Valuation of titles subject to the repo. ... ... The day of the perfection of the repo in question, the estimated Premium will be the result of applying the formula indicated above, for which the target rate for monetary policy purposes that is made known on the internet electronic page of the Bank of Mexico, from the date of perfection and until the valuation date, will be taken, assuming, for the purposes of this calculation, that said rate will remain constant during the remaining term of the repo. Additionally, in case that, from the day of the perfection of the repo and until the agreed date of the expiration of the repo term, the aforementioned target interest rate is modified by decision of the Government Board of the Bank of Mexico, the value of said rate will be taken as applicable for each of the days from that on which it has been made known and until the agreed date of expiration of the repo term. Without prejudice to the foregoing, the Premium that the repo Institution must pay to the Bank of Mexico will be that resulting from the calculation performed, at the expiration of the repo term, in accordance with what is indicated in the item "Premium" of this section. ... a)... b)... ..."

"3.2 Payment of the repo. ... ... ... The Bank of Mexico may abstain from celebrating a new repo operation with an Institution, as well as from extending or renewing repos previously celebrated, in accordance with what is provided in section 2.2 above, when said Institution does not meet the conditions provided in these Rules, with what is stipulated in the respective repo contract, as well as when said Institution fails to meet the conditions of other operations celebrated by it with the Bank of Mexico in accordance with the respective Rules issued by it to cover liquidity needs. ... ..."

"ANNEX 1 Format of request that Institutions must present to the Bank of Mexico Mexico City, on (DAY) of (MONTH) of (YEAR). Bank of Mexico Present Attention: General Directorate of Central Banking Operations Through this channel, the undersigned, [ FULL NAME ], in my capacity as [ POSITION ] of the credit institution named [ FULL NAME OF THE CREDIT INSTITUTION, INCLUDING, IF APPLICABLE, THE FINANCIAL GROUP TO WHICH IT BELONGS ], [in the name and on behalf of said institution / in the name of said institution and on behalf of [ FULL NAME OF THE BROKERAGE HOUSE, INVESTMENT FUND OR SPECIALIZED SOCIETY FOR RETIREMENT FUNDS, INCLUDING, IF APPLICABLE, THE FINANCIAL GROUP TO WHICH IT BELONGS ]*, request the Bank of Mexico grant my represented party a temporary financing, in terms of what is provided in the "RULES APPLICABLE TO CORPORATE TITLE REPO OPERATIONS WITH THE BANK OF MEXICO TO COVER LIQUIDITY NEEDS", issued by that Central Institute through Circular 18/2020, published in the Official Gazette of the Federation on May 19, 2020, as modified subsequently. The amount of the referred financing that my represented party requests is of $________________ (amount in letters), pesos, national currency, and the date required for the disposal of the resources by my represented party is the [ DAY ] of the [ MONTH ] of the [ YEAR ], subject to the transfer of the titles subject to repo in the respective securities deposit accounts that Indeval maintains at the Bank of Mexico or in the custodian abroad that the Bank of Mexico itself indicates. For these effects, my represented party accepts to celebrate the repo operations in the form and terms provided in the aforementioned Circular, as well as in the corresponding contracts. In the same way, my represented party manifests its agreement with the modifications that, in their case, have been made to Circular 18/2020, subsequent to the celebration of the contract that documents the repo operation with the Bank of Mexico. Likewise, it recognizes that, in case of discrepancy between the terms and conditions established in the referred contract and those provided in the said Circular and its respective modifications, which are in force at the time of the present request, the terms and conditions provided in the Circular and its respective modifications will prevail. Additionally, with the purpose of having agile communication for clarifications or requests for additional information, the Institution designates the following contacts: Name Position Phone Email

18 OFFICIAL GAZETTE Thursday, July 23, 2020 I declare, under oath, that the statements contained in this communication are true and reliable, for all legal effects that may apply. Sincerely, [NAME AND SIGNATURE OF THE LEGAL REPRESENTATIVE WITH POWERS TO CARRY OUT DOMINION ACTS]

• Include this text in case that the repo operation in question is intended to be celebrated on behalf of a brokerage house, investment fund or specialized society for retirement funds, in accordance with section 2.1, second paragraph, of these Rules."

"ANNEX 2 Format of payment communication that Institutions must present to the Bank of Mexico Mexico City, on (DAY) of (MONTH) of (YEAR). Bank of Mexico Present Attention: Operations Management Department Through this channel, I inform you that on [ DAY ] of [ MONTH ] of [ YEAR ] [ FULL NAME OF THE CREDIT INSTITUTION, INCLUDING, IF APPLICABLE, THE FINANCIAL GROUP TO WHICH IT BELONGS ], will make the advance payment of the financing granted to it by the Bank of Mexico in terms of Circular 18/2020, as modified subsequently, for: The Repo Price equivalent to the amount of $ __________________ (amount in letters), pesos, national currency, plus the Repo Premium and, if applicable, corresponding accessories, or A partial payment of the Repo Price equivalent to the amount of $ __________________ (amount in letters), pesos, national currency, plus the Repo Premium and, if applicable, corresponding accessories, thereby authorizing and instructing that Central Institute to make the respective charge in the Unique Account that it maintains for this institution in terms of the contract. Sincerely, (NAME AND SIGNATURE OF PERSONS PREVIOUSLY REGISTERED AT BANK OF MEXICO)"

"TRANSITORY FIRST. These Rules will enter into force on the day of their publication in the Official Gazette of the Federation and their validity will expire on June 30, two thousand twenty-three. FIRST BIS. Institutions may request the celebration of the repos referred to in these Rules, as well as perfect the respective repos, in accordance with the corresponding calls that the Bank of Mexico will make known, in the periods indicated below, according to the titles subject to repo that fall into the following circumstances: I. Until September 30, 2020, regarding any of the titles described in the section "Titles subject to the repo" included in section 2.2 of these Rules; II. Until December 31, 2021, only regarding any of the titles that have been issued, in national currency or in UDIS, after July 16, 2020 and until December 31, 2020 and that fall into the circumstance of subsection i) of the section "Permitted Extensions and Renewals" included in section 2.2 of these Rules, and III. Until June 30, 2023, only regarding any of the titles that have been issued, in national currency or in UDIS, after July 16, 2020 and until December 31, 2020 and that fall into the circumstance of subsection ii) of the section "Permitted Extensions and Renewals" included in section 2.2 of these Rules.

Thursday, July 23, 2020 OFFICIAL GAZETTE 19

Regarding repurchases that Institutions request to enter into pursuant to fractions II and III above with titles issued by multiple banking institutions, these may only be entered into if the maturity of such titles has been established at the end of a term greater than one year from their date of issuance.

…”

TRANSITORY PROVISIONS

SINGLE. The modifications to these Rules shall enter into force on the day of their publication in the Official Journal of the Federation.

Mexico City, July 17, 2020.- The General Director of Financial Stability, Fabrizio López Gallo Dey.- Signature.- The General Legal Director, Luis Urrutia Corral.- Signature.- The General Director of Affairs of the Financial System, José Luis Negrín Muñoz.- Signature.- The Director of Support for Operations, Joaquín Rodrigo Cano Jauregui Segura Millan.- Signature.

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