Circular 3/2007 — Modifies Circular 115/2002

CIRCULAR 3/2007
Mexico, D.F., August 31, 2007.
TO THE SECURITIES COMPANIES:
SUBJECT: MODIFICATIONS TO CIRCULAR 115/2002.
PROCEDURE TO ACT AS MARKET MAKERS FOR GOVERNMENT SECURITIES.

The Bank of Mexico, in its capacity as financial agent of the Federal Government, based on what is provided in Articles 3, fraction III, 7, fraction I, and 10 of the Bank of Mexico Law, 8, third and fourth paragraphs, 10 and 12 in relation to 19, fractions I, II, VI and IX, which provide for the powers of the General Directorate of Central Bank Operations to negotiate and formalize, among others, operations with securities; carry out the necessary acts for the issuance, placement, purchase, sale and redemption of government securities, operate mandates or commissions entrusted to the Bank related to the aforementioned powers, and to participate in the issuance of provisions, as well as 17, fraction I, which establishes the power of the Central Bank Provisions Directorate to issue provisions, all of the Internal Regulations of the Bank of Mexico published in the Official Journal of the Federation on September 30, 1994, whose last modification was published in said Journal on April 26, 2007, and at the request of the Secretariat of Finance and Public Credit, attached to this copy of office 305.-110/2007 dated August 28, 2007, through which the aforementioned Secretariat: i) Establishes the procedure for the collection of the premium that Market Makers must pay to the Bank of Mexico for each securities lending operation they conclude; ii) Modifies paragraph 4.2.5 of office 305.-088/2007, dated July 26, 2007, made known through our Circular 2/2007. This is so that those securities companies are able to know it.

For the above, from this date, the aforementioned office 305.-110/2007 is incorporated into Appendix 1 of Annex 5 of Circular 115/2002.

Sincerely,

BANK OF MEXICO

SECRETARIAT OF FINANCE AND PUBLIC CREDIT
UNDERSECRETARIAT OF PUBLIC CREDIT
Office No. 305.-110/2007
Mexico, D.F., August 28, 2007.
Act. David Aarón Margolín Schabes
General Director of Central Bank Operations
Bank of Mexico
Present.

The Secretariat of Finance and Public Credit, based on Articles 31, fractions V and VI of the Organic Law of the Federal Public Administration; 4, fraction V of the General Public Debt Law; 17, fractions VIII, XI and XIX of its Internal Regulations; in the Agreement that authorizes the Head of the Public Credit Unit to exercise the powers indicated, issued by the Head of this Department published in the Official Journal on February 26, 2007, as well as in Articles 3, fraction 111; 7, fraction I; 8 and 10 of the Bank of Mexico Law and, considering that:

It is convenient to promote the activity that each Market Maker has in the forward repo and securities lending markets, adjusting the determination of the premium of the securities lending operations they conclude in their capacity as Market Makers with the Bank of Mexico based on the activity they have in the aforementioned markets.

Has resolved to modify paragraph 2.4 of Office 305.-038/2006, dated February 27, 2006, to read as follows:

2.4 The measurement of the IAA of Applicants will be carried out monthly starting on the 16th of each month and concluding on the 15th of the following month. In the event that any of the mentioned days is a non-business day for intermediaries, the next immediate business day will be taken into account for the start date and the previous immediate business day for the end date of the period. For the calculation of the IAA, information corresponding to measurement periods of the last six months will be included. The IAA measurement will be carried out for all Applicants who have submitted the application referred to in paragraph 2.1, at least ten Business Days before the last day of the corresponding measurement period.

Likewise, it has resolved to modify paragraph 4.2.6 of Office 305.-038/2006, in the following terms:

4.2.6 Market Makers must pay the Bank of Mexico a premium for each securities lending operation they conclude. The amount of said premium

SECRETARIAT
OF
FINANCE AND PUBLIC CREDIT

UNDERSECRETARIAT OF PUBLIC CREDIT
Office No. 305.-088/2007

will be obtained by multiplying the weighted government funding rate, which the Bank of Mexico calculates and makes known daily through its website www.banxico.org.mx or through any other electronic, computing or telecommunications medium authorized for this purpose by said Bank, by a factor that will be determined in accordance with what is specified in Annex 2 of this Office.

The Bank of Mexico, in its capacity as financial agent of the Federal Government, will be responsible for calculating this factor monthly starting on the 16th of each month and concluding on the 15th of the following month, to be applied from the first Business Day of the next calendar month. In the event that any of the mentioned days is a non-business day for intermediaries, the next immediate business day will be taken into account for the start date and the previous immediate business day for the end date of the period. For these purposes, Applicants and Market Makers must send the necessary information to the Bank of Mexico, in the terms it determines, to measure the operability of each of them in the repo and securities lending markets. Likewise, the Bank of Mexico will inform each Market Maker monthly of the factor that will be applied to the weighted government funding rate during the following month to calculate the corresponding premium, at least four Business Days before the end of each month through some authorized electronic medium for this purpose by said Bank.

Intermediaries who join the list of Market Makers, which the Secretariat publishes according to paragraph 5.2, will not be subject to the factor determined in Annex 2 during the two calendar months following the date of their incorporation as Market Makers. In this case, the premium will be determined by multiplying the weighted government funding rate that the Bank of Mexico calculates and makes known daily through its website www.banxico.org.mx or through any other electronic, computing or telecommunications medium authorized for this purpose by said Bank, by a factor of 5%.

SECRETARIAT
OF
FINENCE AND PUBLIC CREDIT

UNDERSECRETARIAT OF PUBLIC CREDIT
Office No. 305.-088/2007

TRANSITORY PROVISIONS
FIRST.- The modification to paragraph 2.4 will enter into force on the Business Day following the date on which the Bank of Mexico makes this office known to intermediaries.

For its part, the modification to paragraph 4.2.6 will enter into force from October 1, 2007.

SECOND.- The factor that will be applied to determine the premium of securities lending operations during the month of October 2007 will be calculated considering the period from August 16 to September 15, 2007. The Bank of Mexico will make said factor known to each Market Maker by September 25, 2007 at the latest.

THIRD.- Except for the modifications contained in this office, the other provisions of Office 305.-038/2006 will remain in their terms.

Finally, we instruct the Bank of Mexico to, in its capacity as financial agent of the Federal Government, carry out the acts that are necessary to implement what is provided in this office, making known to Financial Intermediaries what is established therein.

Without further particulars, I renew to you the assurances of my most distinguished consideration.

EFFECTIVE VOTING. NO
REELECTION

The Head of the Unit
Gerardo Rodríguez Regordosa

ccp Dr. Alejandro Werner Wainfield.- Undersecretary of Finance and Public Credit.- Present.
Act. Alicia C. Núñez de la Huerta.- Deputy General Director of Capture.- Present.

SECRETARIAT
OF
FINANCE AND PUBLIC CREDIT

UNDERSECRETARIAT OF PUBLIC CREDIT
Office No. 305.-088/2007

Annex 2
Quantification of the cost for the Lending of Securities to Market Makers by the Bank of Mexico.

The premium that each Market Maker j will pay to the Bank of Mexico for each securities lending operation they conclude, will be determined by a factor αj that will be applied to the weighted government funding rate i that the Bank of Mexico calculates and makes known daily through its website www.banxico.org.mx or through any other electronic, computing or telecommunications medium authorized for this purpose by said Bank. Then the premium Cj for each participant j will be:
Cj = i * αj (1)

This premium may be reduced based on the operability in the repo and securities lending markets of each Market Maker. 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 paragraph 4.2.6 of this Office) and according to the term and counterparty of the operations. In the event that operations are carried out with entities belonging to the same financial group, they will not be considered as part of the operation for the calculation of the factor. In the Repo Market, the amount of operations negotiated 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 securities lending that are carried out with CETES and Bonds will be considered.

The factor αj* that each Market Maker j will pay on the government funding rate will be obtained according to the following formula:
αj* = a - [ 2/ω { 1 - 2^(-λi/Ri) } ] - [ 2/ω {1 - 2^(-λi/Pi)}] (2)

SECRETARIAT
OF
FINANCE AND PUBLIC CREDIT

UNDERSECRETARIAT OF PUBLIC CREDIT
Office No. 305.-088/2007

where:
αj* = factor on the government funding rate to determine the premium of loans for Market Maker j. a = maximum factor on the government funding rate for counter service collection, a ≥ 0.05. Initially this factor will be equal to 0.07. ω = discount factor, ω ∈ [0, a]. Initially this discount factor will be equal to 0.04. Rj = daily average balance during the measurement period of the forward repo operation of Market Maker j. Pj = daily average balance during the measurement period of securities loans of Market Maker j. λj = 10 / Vj. Vj daily average balance during the measurement period of the securities lending counter service exercised by Market Maker j.

Repo operations will be divided into two segments, according to the nature of the counterparty: interbank (B) and rest (C). In this way, repo operations will be quantified as follows:
Rj = (1/N) ∑{N=B,C} ∑{t=1}^{N} βs (0.25 R1stj + 0.5 R2stj + R3stj) (3)

where,
βs = weight for each segment s, βs ∈ [0.1]. Initially, βB = βC = 1.
R1stj = amount of repos negotiated on day t for segment s with a term of 11 to 20 days for Market Maker j.

SECRETARIAT
OF
FINANCE AND PUBLIC CREDIT

UNDERSECRETARIAT OF PUBLIC CREDIT
Office No. 305.-088/2007

R2stj = amount of repos negotiated on day t for segment s with a term of 21 to 30 days for Market Maker j.
R3stj = amount of repos negotiated on day t for segment s with a term greater than 30 days for Market Maker j.
N = number of banking business days t of the measurement month.
S = segment: interbank (B) and rest (C).

For its part, activity in the securities lending market will be measured according to:
Pj = (1/N) ∑_{l=1}^{N} Ptj (4)

where:
Ptj = amount of outstanding loans on day t of the measurement period by Market Maker j.
N = number of banking business days t of the measurement month.

The Secretariat may modify the value of parameters a, β and ω previously defined.

SECRETARIAT
OF
FINANCE AND PUBLIC CREDIT