Circular 3/2006 — Amends Circular 115/2002

CIRCULAR 3/2006
Mexico, D.F., March 16, 2006.
TO SECURITIES BROKERAGES:
SUBJECT: AMENDMENTS TO CIRCULAR 115/2002.
Banco de México, based on articles 24 and 26 of its Law, as well as article 22, fraction IV, subsection b) of the Securities Market Law, considering the convenience for securities brokerages to have the possibility of granting credits to their clients for the acquisition and sale of shares, has resolved to modify section CB.1.6, as well as add section CB.1.7 and Annexes 7 and 8 to Circular 115/2002, to read as follows:

CB.1.6 CREDITS FOR THE PURCHASE OR SALE OF SHARES.

CB.1.6.1 DEFINITIONS.
For brevity, in section CB.1.6, the following shall be understood:

Shares: The titles representing the social capital of companies domiciled in any of the Reference Countries that are: i) registered in the National Securities Registry (RNV) or ii) listed in the International Quotation System (SIC), including ordinary participation certificates on the aforementioned titles, as well as capital contribution certificates representing the social capital of development banking institutions, when registered in the aforementioned Registry. The aforementioned titles must be classified as high or medium marketability, according to the criteria of the Mexican Stock Exchange, S.A. de C.V.

Savings Protection Bonds (BPAS): Titles issued by the Institute for the Protection of Bank Savings, regarding which Banco de México acts as financial agent for issuance, placement, purchase, and sale, in the national market, registered in the RNV.

BREMS: Monetary Regulation Bonds issued by Banco de México registered in the RNV.

Currencies: United States dollars, as well as any other foreign currency that is freely transferable and immediately convertible to the aforementioned currency.

Foreign Financial Entities: Those authorized to act as financial entities by the competent authorities of the countries in which they are constituted, whose debt is rated in terms of Annex 7 of this Circular, by at least two internationally renowned rating agencies, and which are established in the Reference Countries, excluding Mexico.

Reference Countries: Those that belong to the Technical Committee of the International Organization of Securities Commissions and those that are part of the European Community.

Market Price: The closing quotation price of the Shares, according to the last stock exchange events of the corresponding stock exchange, and, with respect to Securities, the price provided on the valuation date by a price provider authorized by the National Banking and Securities Commission.

Securities Lending: The operation through which ownership of Shares is transferred by their holder, known as the lender, to the borrower who undertakes, upon maturity of the established term, to return to the former other Shares from the same issuer and, if applicable, par value, kind, class, series, and maturity date.

Securities: Any debt security with a secondary market – except subordinated obligations, other subordinated securities, and Structured Securities – that is registered in the RNV, that is not included in any of the other definitions of this Circular, and that is rated in terms of Annex 8 of this Circular, by at least two internationally renowned rating agencies.

Bank Securities: Debt securities with a secondary market registered in the RNV issued, accepted, guaranteed, or guaranteed by Credit Institutions, except: a) subordinated obligations; b) other subordinated securities; and c) Structured Securities.

Structured Securities: Titles that are not Government Securities, whose yield is determined based on the variations observed in the prices of financial assets or financial operations known as derivatives on financial assets, such as those provided in section M.11.7 Bis of Circular 2019/95 of Banco de México.

Securities: Bank Securities, Government Securities, Foreign Securities, BPAS, BREMS, and Securities.

Market Value: The result of multiplying the number of Securities or Shares by their Market Price.

Foreign Securities: Debt securities with a secondary market – except subordinated obligations, other subordinated securities, and Structured Securities – denominated in Currencies that are issued, accepted, guaranteed, or guaranteed by: international financial organizations, central banks of Reference Countries other than Mexico, governments of said countries, and Foreign Financial Entities, as well as debt securities listed in the SIC. Such titles must be rated in terms of Annex 8 of this Circular, by at least two internationally renowned rating agencies and be registered, authorized, or regulated, for sale to the general public, by the Securities Commissions or equivalent bodies of the Reference Countries.

Government Securities: Securities registered in the RNV issued or guaranteed by the Federal Government of the United Mexican States, except: Certificates of the Federation Treasury issued under credit restructuring programs in investment units (Special Cetes), as well as any other that is not negotiable or does not have a secondary market.

CB.1.6.2 OPERATIONS.

a) Purchase of Shares with credit
Securities brokerages may grant credits in national currency to their clients so that they can buy Shares. The date of agreement of the purchase of Shares must coincide with the date of agreement of the respective credit. Likewise, the settlement date of the purchase and the disbursement of the credit must be the same.

The amount of credit that securities brokerages grant to their clients, at the time of carrying out each operation, cannot be greater than fifty percent of the acquisition value of the Shares purchased. The difference must be contributed by the clients in cash or guaranteed with Shares, Securities, or shares of investment companies, on the day of the agreement of the credit.

All Shares acquired by clients will be held as collateral in favor of the granting securities brokerage on the settlement date of the respective Share purchase operation.

Securities brokerages may grant these credits with their capital or through financing obtained from credit institutions in the country or from foreign financial institutions.

b) Securities Lending for sale
Securities brokerages may carry out Securities Lending with their clients so that they sell the respective Shares. The date of agreement of the sale of Shares must coincide with the date of agreement of the Securities Lending. Likewise, the delivery date of the Shares subject to the Securities Lending and the settlement date of the Share sale must be the same.

The resources obtained from the sale of the Shares will be held as collateral in favor of the securities brokerage from the day of the settlement of the respective Share sale operation.

Additionally, on the day of agreement of each Securities Lending and Share sale operation, clients must deliver to the securities brokerage as collateral, cash, Shares, Securities, or shares of investment companies for an amount that is not less than fifty percent of the value of the Shares sold.

CB.1.6.3 GUARANTEES

Clients are obligated to constitute additional guarantees to those contributed at the start of each operation, when changes in the Market Value of the Shares occur, which cause the Guarantee Coefficient to be lower than the minimum agreed upon by the parties.

To comply with the above, with respect to the purchase of Shares with credit, the following formula must be applied:

Capital = PM – SD

where:
PM = Is the Market Value of the position of the Shares purchased with credit and of the other Shares, Securities, or shares of investment companies delivered by the client as collateral, plus the cash contributions that the same client delivers.
SD = Is the amount of the credit minus the amounts paid by the client to reduce the debt.

Likewise, with respect to the Securities Lending for sale, the following formula must be applied:

Capital = SA - PM

where:
SA = Are the resources obtained from the sale of the Shares plus the cash contributed by the client as collateral, plus the Market Value of the Shares, Securities, or shares of investment companies that, if applicable, said client contributes as collateral. PM = Is the Market Value of the Shares sold minus the Market Value of the Shares purchased to reduce the position.

The Guarantee Coefficient will be the result obtained by dividing the Capital by PM. At all times, this Guarantee Coefficient must be greater than or equal to 0.25.

Securities brokerages may receive as collateral Shares, Securities, cash, or shares of investment companies.

For the purposes of calculating the Guarantee Coefficient in the case of the long position, the Shares purchased with credit will count at 100 percent of their Market Value.

With respect to the short position, the Shares sold short and the Shares purchased to reduce said position will count at 100 percent of their Market Value. The other Shares, Securities, and shares of investment companies provided as collateral will count at fifty percent of their Market Value both for the purposes of calculating the Guarantee Coefficient and for the purposes of the initial guarantee that the client must deliver on the day of the agreement of the operation in terms of section CB.1.6.2.

Clients must deliver the guarantees referred to in this section on the day the securities brokerage requests it.

Securities brokerages may agree with their clients in the respective contract, the circumstances in which the guarantees may be released. In all cases, once the guarantees are released, the Guarantee Coefficient must be equal to or greater than 0.50.

The guarantees referred to in section CB.1.6 may be constituted through stock exchange surety, pledge, guarantee trust or administration and payment, or bank deposits of money.

CB.1.6.4 TERM.

The parties may freely agree on the term of the credit and Securities Lending for sale operations.

The credit or the Securities Lending for sale may be terminated prematurely in the manner and terms stipulated in the contract under which the respective operations are instrumented.

CB.1.6.5 INTERESTS AND PREMIUM.

Credits and Securities Lending for sale will accrue the interests or premium that the parties freely agree upon.

The calculation of the premium and interests will be made with the formula of a commercial year of three hundred sixty days and the number of days effectively elapsed.

CB.1.6.6 INSTRUMENTATION.

CB.1.6.6.1. Documentation

Prior to the agreement of any credit or Securities Lending for sale operation provided for in CB.1.6, securities brokerages must enter into a written contract with clients. If applicable, securities brokerages may provide in the brokerage contract the carrying out of such operations as long as they are expressly stated.

The contract must stipulate the client's obligation to constitute the guarantees referred to in section CB.1.6 and the circumstances in which additional guarantees must be contributed.

Likewise, the aspects related to the instrumentation and administration of the aforementioned guarantees must be established, such as: their constitution, substitution, execution, and release.

Similarly, the procedure to be followed in case the quotation of the Shares is suspended in the stock exchange must be provided for in the contracts.

The patrimonial rights that, if applicable, the Shares purchased or those subject to the Securities Lending and the Shares, Securities, and shares of investment companies provided as collateral confer, must be paid to the persons who appear as their holders in the records of the institution for the deposit of securities in which they are deposited, at the close of operations of the immediate preceding business day before the payment of the aforementioned patrimonial rights. Without prejudice to the foregoing, the respective contract must provide for the regime applicable to such patrimonial rights and to the exercise of corporate rights of the Shares subject to the credit or the Securities Lending, as well as of the Securities, Shares, and shares of investment companies provided as collateral.

In the contracts that securities brokerages enter into with their clients, clauses must be established in a prominent manner where the following is clearly specified:

a) That through the carrying out of the operations referred to in section CB.1.6 there could be losses greater than the initial contributions made by the client, and b) That the term for providing additional guarantees will be non-extendable. In case of non-compliance by the client, the securities brokerage will execute the guarantees in accordance with the procedure provided for in the contract and liquidate the operation.

Securities brokerages will be responsible for ensuring that the operations they enter into and the aforementioned contracts strictly comply with these provisions, as well as with any others applicable to them.

CB.1.6.6.2. Receipts and Records

The agreement of the credit, Securities Lending for sale, and, if applicable, the different acts carried out by virtue of them, must be carried out through any of the forms established in the contract itself.

Securities brokerages must issue on the same day they carry out the operations of: i) purchase of Shares with credit; ii) Securities Lending for sale; iii) sale of Shares, and iv) constitution, substitution, or release of guarantees, referred to in section CB.1.6, a receipt by any means that leaves documentary evidence, even in electronic media, of the carrying out of the corresponding operation, which they must keep available for the client or send it to them in case they request it.

The respective receipt must include the indispensable information so that the client can fully identify the operation carried out, such as, among others: i) the term and type of operation (purchase of Shares with credit, Securities Lending for sale, sale of Shares, constitution, substitution, or release of guarantees); ii) the issuance key, issuer, number, Market Price, and amount of Shares purchased or sold, or of the Securities, Shares, or shares of investment companies provided as collateral; iii) if applicable, the amount of cash provided as collateral, and iv) the interest rate applicable to the corresponding operation.

In all cases, securities brokerages must make the records corresponding to the operations referred to in section CB.1.6 on the same day they are carried out.

CB.1.6.7 PROHIBITIONS.

In no case can the operations referred to in section CB.1.6 be carried out under discretionary contracts.

Securities brokerages must refrain from granting their clients credits for the purchase of Shares or Securities Lending for sale provided for in section CB.1.6 in terms different from those indicated in the cited section.

CB.1.7 COMMON PROVISIONS.

With the exception of credits that securities brokerages receive from credit institutions in order to comply with the aggregate liquidity norm applicable to the set of their current outstanding optional title issuances, for securities brokerages to receive or grant credits in terms different from those provided for in section CB.1, they will require prior and written authorization from the Management of Authorizations, Consultations, and Legal Control of Banco de México.

TRANSITORY
SINGLE.- This Circular will enter into force on March 22, 2006.

ANNEX 7
Ratings for Foreign Financial Entities
Debt in Currencies
Standard & Poor’s Moody’s Fitch
AAA Aaa AAA
AA+ Aa1 AA+
AA Aa2 AA
AA- Aa3 AA-
A+ A1 A+
A A2 A
A- A3 A-
BBB+ Baa1 BBB+
BBB Baa2 BBB
BBB- Baa3 BBB-

ANNEX 8
Ratings of Securities in National Currency and in Long-Term Investment Units Standard & Poor’s Moody’s Fitch mxAAA Aaa.mx AAA (mex) mxAA+ Aa1.mx AA+ (mex) mxAA Aa2.mx AA (mex) mxAA- Aa3.mx AA- (mex)

Ratings of Securities in National Currency and in Short-Term Investment Units Standard & Poor’s Moody’s Fitch mxA-1+ MX-1 F1+(mex) mxA-1 MX-2 F1(mex) mxA-2 MX-3 F2 (mex)

Ratings for Foreign Securities
Standard & Poor’s Moody’s Fitch
AAA Aaa AAA
AA+ Aa1 AA+
AA Aa2 AA
AA- Aa3 AA-