Circular 38/2020 — Modifies Circular 3/2012

Monday, October 12, 2020 OFFICIAL GAZETTE BANK OF MEXICO CIRCULAR 38/2020, 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 (regimes for the admission of liabilities and investment for foreign currency passive operations).

At the margin a logo, which says: Bank of Mexico.- "2020, Year of Leona Vicario, Meritorious Mother of the Fatherland".

CIRCULAR 38/2020 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 (REGIMES FOR THE ADMISSION OF LIABILITIES AND INVESTMENT FOR FOREIGN CURRENCY PASSIVE OPERATIONS).

The Bank of Mexico, with the purpose of continuing to promote the sound development and stability of the financial system, in view of the need to adjust the regulatory framework for foreign currency operations to the current characteristics of such operations, deems it convenient, for the purposes of said regulatory framework, on the one hand, to expand the range of liquid foreign currency assets for the purposes of the regimes for the admission of liabilities and investment for foreign currency passive operations of multiple banking institutions, by including long-term foreign currency debt issued abroad by the Federal Government, under the recognition that their characteristics satisfy the required prudential criteria and, on the other hand, to adjust the treatment of foreign currency deposit accounts with checkbooks to foreign currency demand deposit accounts, in general, in order to take into account the characteristics of foreign currency deposits offered by credit institutions currently. In this sense, the Bank of Mexico will continue to observe the development of operations carried out by credit institutions with the public in order to, if applicable, make adjustments to the applicable regulation to reflect changes in the conditions of said operations.

For the above, based on articles 28, paragraphs sixth and seventh, of the Political Constitution of the United Mexican States, 24 and 26, of the Bank of Mexico Law, 48 of the Credit Institutions Law, 87-D, paragraph fourth, of the General Law of Credit Auxiliary Organizations and Activities, 22 of the Law for Transparency and Ordering of Financial Services, 4, paragraph first, 8, paragraphs fourth and eighth, 10, paragraph first, 12 Bis, paragraph first, in relation to 20 Quáter, fraction IV, 14, paragraph first, in relation to 25, fraction VII, 14 Bis, paragraph first, in relation to 17, fraction I, 14 Bis 1, in relation to 25 Bis 1, fraction IV, with 25 Bis 2, fraction II, and with 25 Bis 3, fraction II, 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 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, X and XVII, of the Agreement on the Attachment of Administrative Units of the Bank of Mexico, has resolved to modify the index, article 2, subsections a) and f) of the definition of Money Market Assets, as well as sub-subsection iii) of subsection f), the aforementioned subsection f), and sub-subsection iv) of subsection g), of the definition of Liquid Assets, the definition of Credit Rating for Liquidity Requirement, as well as the definition of Foreign Currency to be Received, contained in the aforementioned article 2, articles 230, 231, 232, fraction I, first paragraph, and fraction II, last paragraph, 233, fraction II, 234, fractions V, VI and VIII, subsection b), and Annex 21, as well as adding a subsection h) to the definition of Liquid Assets provided for in article 2, of the "Provisions applicable to 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 remain in the following terms:

OFFICIAL GAZETTE Monday, October 12, 2020 PROVISIONS APPLICABLE TO 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

INDEX ... "Annex 21 Classification of Foreign Currency Demand Deposit Accounts" ... Definitions "Article 2.- ... Money Market Assets: ... a) Securities with a secondary market, with an original maturity greater than one year, other than those included in subsections c) and h) of the definition of Liquid Assets; provided that they meet the following requirements: i) ... ii) ... b) to e) ... f) Assets indicated in subsections b) to f) and h) of the definition of Liquid Assets that are given, in term operations with maturity up to one year, as collateral, loan, repurchase agreement or through any other legal figure that limits their free availability; g) to h) ... Liquid Assets: ... a) to e) ... f) Investments in investment companies or funds, other than those referred to in the Investment Funds Law, which the Bank of Mexico authorizes upon proposal of Multiple Banking Institutions through the Mexican Bank Association, A.C., that meet the following requirements: i) to ii) ... iii) Have a rating of at least that corresponding to the M4 rating level of the "Credit rating table for international investment funds" included as Annex 5 of Circular 39/2020 of the Bank of Mexico, granted by the respective securities rating institution indicated in said Annex or the equivalent determined by the Bank of Mexico according to the following paragraph. In the event that the investment company or fund in question has a rating granted by any securities rating institution of recognized prestige in the jurisdictions referred to in the previous sub-subsection i), which is different from the institutions indicated in the table of the cited Annex 5,

Monday, October 12, 2020 OFFICIAL GAZETTE the aforementioned proposal that Multiple Banking Institutions present through the Mexican Bank Association, A.C., must be accompanied by information on said rating, in order for the Bank of Mexico to determine, within a period not exceeding five Banking Business Days, the correspondence of said rating with the levels indicated in the referred table. It will be considered that the investment company or fund in question does not have the rating referred to in this subsection, when said company or fund is rated by two of the aforementioned institutions and any of those ratings is lower than those indicated, or when the referred company or fund has more than two ratings granted by the referred institutions and does not have at least two of said ratings that are equivalent or superior to those indicated previously in this subsection, and iv) ... g) ... i) to iii) ... iv) The resources derived from its exercise are not committed for a specific use, and h) UMS BONDS. Customer Bank: ... Supplier Bank: ... BONDES: ... UMS BONDS: ... BREMS: ... Credit Rating for Liquidity Requirement: the degree of rating, for the purposes of calculating the regimes for the admission of liabilities and investment for Foreign Currency Operations established in these Provisions, applicable to long-term debt, that is equal to or greater than that corresponding to the N10 rating level of the "Global Scale Long-Term Credit Rating Table" included as Annex 1 of Circular 39/2020 of the Bank of Mexico or, in the case of short-term debt, to that which is equal to or greater than that corresponding to the Nii rating level of the "Global Scale Short-Term Credit Rating Table" included as Annex 3 of said Circular. It will be considered that said rating is not held when the financial entity, company or issuance in question has not been assigned at least two degrees of ratings equal to or greater than those corresponding to those previously indicated, or when any of the degrees of ratings assigned to them is lower than that corresponding to those indicated previously.

OFFICIAL GAZETTE Monday, October 12, 2020 Clearing Chamber: ... Payment Capacity: ... CBIC-FARAC: ... CETES: ... SPECIAL CETES: ... CLABE: ... Clearing: ... Payroll-Associated Credit: ... Account: ... SPEI Account ... SPID Account ... Dollar Account: ... Dollar Account for SPID Funding: ... Ordering Account: ... Receiving Account: ... Single Account: ... Segregated Coupons: ... Deposits: ... Days: ... Banking Business Days: ... International Banking Business Days: ... Currencies: ... Documents: ... Dollars: ... Direct Debit: ... Business Group: ... Institutions: ... Development Banking Institutions: ... Multiple Banking Institutions: ... Ordering Institution: ... Receiving Institution: ... RSP Manual: ... Collection Message: ... Precious Metals: ... RSP Module: ... Foreign Currency: ... Foreign Currency to be Received: ... a) Spot foreign exchange operations carried out with the following Mexican financial entities: Institutions; brokerage houses; investment funds;

Monday, October 12, 2020 OFFICIAL GAZETTE specialized investment societies for retirement funds; exchange houses, and insurance institutions and mutual societies, that have a short-term rating degree equal to or greater than that corresponding to the Niimx rating level of the "Local Scale Short-Term Credit Rating Table" included as Annex 4 of Circular 39/2020 of the Bank of Mexico, as well as those carried out with foreign financial entities and other persons, that have Credit Rating for Liquidity Requirement, and b) Derivative operations carried out in recognized markets, and derivative operations carried out with the following Mexican financial entities: Institutions; brokerage houses; investment funds; specialized investment societies for retirement funds and insurance institutions and mutual societies, that have a short-term rating equal to or greater than that corresponding to the Niimx level of Annex 4 cited in subsection a) above, as well as those carried out with foreign financial entities and other persons, that have Credit Rating for Liquidity Requirement. All the aforementioned operations must have a maturity of up to one year. Payment Obligations: ... Foreign Currency Operations: ... Pattern: ... PIC-FARAC: ... Computation Period: ... Short Position: ... Long Position: ... Foreign Exchange Risk Position: ... Labor Benefits: ... Computer Program: ... Supplier: ... Dollar Receipts ... SAGAPL: ... Receipt Direct Debit Service: ... Cash Exchange and Clearing Service Banking: ... Payroll Service: ... Electronic Funds Transfer Service: ... Linked SOFOM E.R.: ... Deposit Auctions: ... Liquidity Auctions: ... SIAC-BANXICO: ... SICAM: ...

OFFICIAL GAZETTE Monday, October 12, 2020 SPEI: ... SPID ... Foreign Branches: ... Debit card: ... Cardholder: ... TIIE for Periods Greater Than One Banking Business Day: ... Funding TIIE: ... Bank Securities: ... UDIS: ... UDIBONOS ... Securities: ... IPAB Securities: ... Government Securities: ..."

Exceptions to the regimes for the admission of liabilities and investment "Article 230.- The provisions of articles 226 and 228 of these Provisions shall not apply to Multiple Banking Institutions that have, on the one hand, an unconditional, general and permanent guarantee for the fulfillment of their Foreign Currency Operations, granted by foreign financial entities whose long-term debt has been assigned a rating degree equal to or greater than that corresponding to the N4 rating level of the "Global Scale Long-Term Credit Rating Table" included as Annex 1 of Circular 39/2020 of the Bank of Mexico and, on the other hand, the authorization of the Bank of Mexico for such purpose."

Computation of liabilities for the investment regime "Article 231.- For the purposes of the investment regime for Foreign Currency Operations, liabilities shall be computed as follows: a) in the case of Foreign Currency Demand Deposit Accounts, those included in "Part 1" of subsection a) of Annex 21 of these Provisions shall be weighted by a factor of 0.20, while the Foreign Currency Demand Deposit Accounts included in "Part 2" of the aforementioned subsection a) of Annex 21, shall be weighted by a factor of 0.30, and b) the rest of the liabilities other than the aforementioned Accounts shall be weighted by a factor of 0.95."

Operations included in the calculation of the regimes for the admission of liabilities and investment Article 232.- ... I. "They shall include in the computation of Foreign Currency Operations those carried out by their agencies and branches abroad, as well as their national and foreign financial subsidiaries that are not brokerage houses, exchange houses, guarantee institutions, insurance institutions, investment fund operating societies, retirement fund administrators, investment funds, or specialized investment societies for retirement funds. For these purposes, subsidiaries are considered to be those financial entities with respect to which the Multiple Banking Institution or the holding company of the financial group to which it belongs is the direct or indirect owner of voting shares representing at least fifty-one percent of the paid-up capital, has control of the general shareholders' meetings or has the right to appoint the majority of the members of the board of directors or their equivalents. ... II. ... ...

Monday, October 12, 2020 OFFICIAL GAZETTE Foreign Currency Operations shall be computed at book value in terms of the provisions issued by the aforementioned Commission, net, if applicable, of the corresponding estimates. As an exception to the above, the values referred to in subsections c) and h) of the definition of Liquid Assets and a), b), c) and d) of the definition of Money Market Assets shall be computed at their market value."

Computation Article 233.- ... I. ... "II. The amount of Foreign Currency Demand Deposit Accounts shall be classified in accordance with what is indicated in Annex 21 of these Provisions." III. to IX. ... Other operations that must be included in the computation Article 234.- ... I. to IV. ... "V. The values included in subsection a) of the definition of Money Market Assets shall be computed, only by a percentage of their market value specified in the following table, applicable to any of the following situations: (i) to the lowest of the ratings granted to said values, for international purposes, by the institutions indicated in the same table, in the event that only one or two ratings have been granted or well, (ii) to the lowest rating among the two highest that have been granted, in the event that three or more ratings have been granted:

Rating % Computable Regarding Market Value Level Investment Grade

N4 100 N5 90 N6 90 N7 90 N8 80 N9 80 N10 80 Speculative Grade N11 50 < N12 0

In the event that the values contemplated in this fraction have a rating degree granted by any securities rating institution other than those indicated in the previous table, the Multiple Banking Institution in question must present to the Bank of Mexico information on said values and the referred rating degree, in order for the latter to determine, within a period not exceeding five Banking Business Days, the equivalence to the indicated investment degrees and the computable percentage that must be applied.

OFFICIAL GAZETTE Monday, October 12, 2020 VI. The values referred to in subsection a) of the definition of Money Market Assets, which have a rating degree lower than that corresponding to level N7 of those included in the "Global Scale Long-Term Credit Rating Table" included as Annex 1 of Circular 39/2020 of the Bank of Mexico, may only be computed as Money Market Assets by an amount not greater than one percent of the average of the computable liabilities with a maturity of less than sixty-one Days, referred to in fraction II of article 232 of these Provisions, relative to the second immediate preceding period to the period in question. In the event that the values contemplated in this fraction have a rating degree granted by any securities rating institution other than those indicated in the aforementioned Circular 39/2020, the Multiple Banking Institution in question must present to the Bank of Mexico information on said asset and the respective rating degree, in order for the latter to determine, within a period not exceeding five Banking Business Days, the equivalence to the indicated investment degrees. VII. ... VIII. ... a) ... b) Five hundred million Dollars, if the financial entity or entities backing them have a rating degree equal to or greater than that corresponding to the Ni level of the "Global Scale Short-Term Credit Rating Table" Annex 3 of Circular 39/2020 of the Bank of Mexico or well, two hundred fifty million Dollars, if the rating degree of said financial entities is equal to or less than that corresponding to the Nii rating level of said Annex 3." ... IX. ... ANNEX 21 "Classification of Foreign Currency Demand Deposit Accounts For the purposes of the regimes for the admission of liabilities and investment for Foreign Currency Operations, Foreign Currency Demand Deposit Accounts shall be classified as follows: a) Their amount shall be classified into two parts: ... ... Where P1 = ... PMAC1 = ... PMACt = ... SDCt =... PART 2 ... Where P2 = ... PMAC2= Sum of the accounts, in average monthly daily balances, that in the month immediately preceding the Day being computed have accrued an interest rate greater than fifty percent of the LIBOR RATE. ... ...

Monday, October 12, 2020 OFFICIAL GAZETTE b) PART 1 shall be divided by 60 and the resulting amount shall be computed for each of the Days from 1 to 60, while PART 2 shall be divided by 30 and the resulting amount shall be computed for each of the Days from 1 to 30. For these purposes, the LIBOR RATE shall be the monthly average of the month immediately preceding the Day being computed, of the annual rate offered in the interbank market for Dollars in the city of London, England, for three-month deposits, made known by Reuters at 11:00 hours, time of said city. In the event that the aforementioned rate ceases to be made known or that, subject to the determination of the Bank of Mexico, it ceases to be considered as an adequate reference of market conditions, the reference rate indicated by the Bank of Mexico to Multiple Banking Institutions in consideration of that recognized by the competent authorities of the United States of America shall be taken. For the calculation of the aforementioned monthly average, the corresponding rate of each Day of the cited month immediately preceding the Day being computed shall be considered and the rate relative to the immediately preceding Banking Business Day shall be applied for non-business days."

TRANSITORY PROVISIONS FIRST.- This Circular shall enter into force on the Banking Business Day following its publication in the Official Gazette of the Federation. SECOND.- As an exception to the above, Institutions must comply with the investment regime for their Foreign Currency Passive Operations, in accordance with the provisions in force prior to the entry into force of this reform, until the period between October 15 and November 11, 2020, provided for in Annex 20 of Circular 3/2012, concludes. In any case, those Institutions that so decide may comply with the investment regime for their Foreign Currency Passive Operations in terms of this reform, from the period mentioned in the previous paragraph, subject to informing the Bank of Mexico of such situation by sending a communication to the Financial System Information Directorate, no later than October 14 of this year. Mexico City, October 2, 2020.- BANK OF MEXICO: The General Director of Payment Systems and Market Infrastructures, Manuel Miguel Ángel Díaz Díaz.- Initials.- The General Director of Financial Stability, Fabrizio López Gallo Dey.- Initials.- The General Legal Director, Luis Urrutia Corral.- Initials.- The General Director of Affairs of the Financial System, José Luis Negrín Muñoz.- Initials.- The Director of Operations Support, Joaquín Rodrigo Cano Jauregui Segura Millan.- Initials. For any queries regarding the content of this Circular, the Bank of Mexico is at your disposal through the Central Banking Authorizations and Sanctions Directorate at telephone (55) 5237-2000 extension 3200.