Circular 32/2010 — Modifies Circular 4/2006

Monday, October 25, 2010 OFFICIAL GAZETTE (First Section) 100

CIRCULAR 32/2010 addressed to multiple banking institutions, brokerage houses, investment companies, and limited-purpose financial companies regarding modifications to Circular 4/2006.

At the margin, a logo that says: Bank of Mexico.

CIRCULAR 32/2010

TO MULTIPLE BANKING INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT COMPANIES AND LIMITED-PURPOSE FINANCIAL COMPANIES:

SUBJECT: MODIFICATIONS TO CIRCULAR 4/2006

The Bank of Mexico, in order to promote the sound development of the financial system, deems it appropriate to make modifications to the regulation regarding financial derivative operations. The foregoing, considering that:

a) It is convenient to foster the creation in Mexico of a market for financial derivative operations on commodities, which allows for better risk management for participants in said market.

b) In most countries where financial derivative operations are conducted, trading with commodities as underlyings is permitted.

c) Through its letter no. UBVA/074/2010, the Secretariat of Finance and Public Credit (SHCP) has interpreted, in exercise of the attribution conferred upon it by Article 5 of the Credit Institutions Law, that the inclusion of underlyings that are commodities by the Bank of Mexico in its regulation regarding financial derivative operations is consistent with the legal framework of said Law, in virtue of the following:

1. The celebration by credit institutions of derivative operations whose underlyings are commodities on behalf of third parties, regardless of their settlement methodology, does not trigger the prohibition provided for in Article 106, fraction XI of the Credit Institutions Law, given that the financial entity acts in the capacity of a financial intermediary, in the name and on behalf of another person, in the execution of operations that are permitted to it under Article 46, fraction XXV of the aforementioned Law.

2. The celebration on its own account, by credit institutions, of derivative operations whose underlying is a commodity, in whose terms physical delivery of the underlying asset is prohibited for settlement, and instead expressly provides for cash settlement of the operation, are considered exclusively financial operations and therefore do not violate the prohibition provided in Article 106, fraction XI of the Credit Institutions Law.

3. The celebration on its own account, by credit institutions, of derivative operations whose underlying is a commodity, in whose terms physical delivery is provided as a means of settlement, which are in fact settled through mechanisms, such as position closure or others that prevent the physical delivery of the underlying, are considered exclusively financial operations and therefore do not violate the prohibition provided in Article 106, fraction XI of the Credit Institutions Law.

4. The only scenario in which the prohibition provided for in Article 106, fraction XI of the LIC would be triggered, in the realization of a derivative operation on its own account celebrated by a credit institution whose underlying is a commodity, would be if, in the settlement of said derivative operation, the credit institution carries out the commercial sale and purchase of the commodities that constitute the underlying of the operation, either to fulfill its delivery obligation in said settlement, or to dispose of the commodities acquired by the settlement of the operation.

d) The participation of credit institutions and brokerage houses in the aforementioned operations is important in order to provide liquidity and depth to this market.

Based on the foregoing and pursuant to Articles 28 of the Political Constitution of the United Mexican States, sixth and seventh paragraphs; 24 and 26 of the Bank of Mexico Law; 46 fraction XXV of the Credit Institutions Law; 176 of the Securities Market Law; 22 of the Law for Transparency and Orderly Regulation of Financial Services; 8th, fourth and seventh paragraphs, 10, 12 in relation with 19 fraction VII, 14 Bis in relation with 17 fraction I and 14 Bis 1, first paragraph in relation with 25 Bis 1 fraction IV; all of them of the Internal Regulations of the Bank of Mexico, which grant it the attribution to participate in the issuance of provisions through the General Directorate of Central Banking Operations, the General Legal Directorate, and the General Directorate of Financial System Affairs, respectively; Unique of the Agreement on the Affiliation of the Administrative Units of the Bank of Mexico, fractions III, VII and XII, as well as in the aforementioned letter no. UBVA/074/2010 of the SHCP, the aforementioned Bank of Mexico has resolved to modify numerals 2.1 and 7 of Circular 4/2006, which contains the “Rules to which multiple banking institutions, brokerage houses, investment companies, and limited-purpose financial companies must adhere in the realization of derivative operations,” published in the Official Gazette of the Federation on December 26, 2006, and modified through Circulares 4/2006 Bis, as well as 31/2010, published in the aforementioned Official Gazette on May 4, 2007, and October 6, 2010, respectively, to read as follows:

2. UNDERLYINGS

“2.1 Entities may only conduct Derivative Operations on the following Underlyings:

a) Stocks, a group or basket of stocks, or titles referenced to stocks, that trade on a stock exchange;

b) Price indices on stocks that trade on a stock exchange;

c) National currency, Foreign currencies, and investment units;

d) Price indices referenced to inflation;

e) Nominal, real, or super-interest rates, which include any debt title;

f) Loans and credits;

g) Gold and silver;

h) Yellow corn, wheat, soy, and sugar;

i) Pork;

j) Natural gas;

k) Aluminum and copper, as well as,

l) Forward, Option, and Swap Operations on the Underlyings referred to in the preceding subsections.”

“7. SETTLEMENT METHODS

The Settlement of Derivative Operations may be carried out through the delivery of the previously determined Underlyings or of an amount of money, in accordance with the nature of the operation and what the parties agree.

Entities that conduct Derivative Operations on the Underlyings indicated in subsections h), i), j), and k) of numeral 2.1 on their own account or for the purpose of hedging their own risks, are prohibited from settling such operations in kind.”

10. PROHIBITIONS

“10.4 Entities shall not conduct Derivative Operations when the respective Underlying does not have a market reference rate or price, except: i) if its counterparty is a credit institution, Brokerage House, or Foreign Financial Entity, or ii) when Derivative Operations are conducted with the Underlyings indicated in subsection f) of numeral 2.1 of these Rules.”

TRANSITIONAL PROVISION

UNIQUE. This Circular enters into force on October 26, 2010.

Mexico, D.F., October 21, 2010.- BANK OF MEXICO: The General Director of Financial System Affairs, José Gerardo Quijano León.- Signature.- The General Director of Central Banking Operations, Francisco Javier Duclaud González de Castilla.- Signature.- The General Legal Director, Héctor Reynaldo Tinoco Jaramillo.- Signature.

Monday, October 25, 2010 OFFICIAL GAZETTE (First Section) 102

For any inquiries regarding the content of this Circular, please contact the Department of Authorizations, Consultations, and Legal Control, located at Avenida 5 de Mayo number 2, Colonia Centro, Mexico City, D.F., C.P. 06059, or at the phones 5237.2308, 5237.2000 ext. 3200 or 5237.2317.