Circular 5/2021 — Modifications to Circular 3/2017 (Rules for Foreign Exchange Hedging Auctions)

Monday, August 9, 2021 OFFICIAL GAZETTE 1 BANCO DE MEXICO CIRCULAR 5/2021 addressed to credit institutions, regarding modifications to Circular 3/2017 (Rules for Foreign Exchange Hedging Auctions).

At the margin, a logo that says: Bank of Mexico.- “2021: Year of Independence”.

CIRCULAR 5/2021 TO CREDIT INSTITUTIONS: SUBJECT: MODIFICATIONS TO CIRCULAR 3/2017 (RULES FOR FOREIGN EXCHANGE HEDGING AUCTIONS)

The Bank of Mexico, with the purpose of continuing to promote the sound development of the financial system, foster the proper functioning of payment systems, and protect the interests of the public, has determined the convenience that the foreign exchange hedges that credit institutions enter into with the Bank of Mexico reflect characteristics similar to those observed in international markets and recognize a broader scheme of financial risk management that these institutions assume as part of these operations. In particular, the modifications seek that Foreign Exchange Hedges be settled daily. With this modification, credit institutions holding these instruments that benefit from exchange rate movements will receive the corresponding compensation daily. Likewise, in the event that credit institutions holding these instruments are affected by exchange rate movements, they must settle the corresponding loss daily. Furthermore, by incorporating non-business days in the United States of America, the aim is to provide a benefit to credit institutions participating in the foreign exchange hedging mechanism by improving their ability to adequately cover the exchange rate risk arising from the maturities of these operations.

For the above, based on articles 28, paragraphs sixth and seventh, of the Political Constitution of the United Mexican States, 7, first paragraph, fraction X and second paragraph, 14, 21, first paragraph, 22, fraction II, 24 and 32, of the Bank of Mexico Law, 22 of the Law for Transparency and Ordering of Financial Services, 4, 8, fourth and eighth paragraphs, 10, first paragraph, 14 Bis, first paragraph, in relation to 17, fraction I, and 19 Bis, fraction V, of the Internal Regulations of the Bank of Mexico, which grant it the authority to issue provisions through the General Legal Directorate and the National Operations Directorate, respectively, as well as Second, fractions VI and X, of the Agreement on the Affiliation of the Administrative Units of the Bank of Mexico, it has resolved to modify the definition of “Foreign Exchange Hedge”, “Single Account”, “Banking Business Day”, “SUBCAM-BANXICO” and “Settlement Exchange Rate” of the 2nd, 5th, 8th, third paragraph of the 9th, first paragraph of the 10th, second paragraph of subsection I., second paragraph of subsection II., and second paragraph of the 11th, second paragraph of the 12th Bis, 13th, first paragraph of the 14th, the denomination of Chapter VI, 20th, 22nd, first paragraph of the 23rd, and annexes 1, 2 and 2 BIS, add a fifth paragraph to the 9th and annex 1 BIS, as well as repeal from the 2nd the definitions of “BONDE”, “BPA”, “BREM”, “CETE”, “Deposits”, “Guarantee”, “INDEVAL”, “SAGAPL”, “SIAC-BANXICO”, “UDI” and “Securities”, 15th, 16th, 17th, 18th, 19th, and annexes 3, 4, 5, 6 and 7, of the “Rules for Foreign Exchange Hedging Auctions”, contained in Circular 3/2017, to remain in the following terms:

RULES FOR FOREIGN EXCHANGE HEDGING AUCTIONS

“2nd. Definitions.- For the purposes of these Rules, the following shall be understood: I. BONDE: Repealed. II. BPA: Repealed. III. BREM: Repealed. IV. CETE: Repealed. V. Foreign Exchange Hedge: the operation that, as a result of the Auction carried out by the Bank of Mexico, this enters into with the Assigned Institution, with the objective that the latter assumes the obligation to pay the Bank of Mexico or acquires the right to receive from it, depending on whether said institution assumes a debtor or creditor position respectively, the amount in pesos that results as due or in its favor, as applicable, equivalent to the settlement amount resulting in accordance with the 13th of these Rules. VI. Single Account: the deposit account in national currency that the credit institution in question maintains at the Bank of Mexico, in accordance with the “Provisions applicable to the operations of credit institutions, multiple-object financial societies regulated that maintain equity links with credit institutions and the National Financial Development Agency for the Agricultural, Rural, Forestry and Fishing Sector”, issued by the Bank itself through Circular 3/2012, as modified in accordance with the respective resolutions issued subsequently. VII. Deposits: Repealed. VIII. Banking Business Day: the day that is business for credit institutions, in terms of the general provisions issued for such effect by the National Banking and Securities Commission, as well as for banking institutions located in the United States of America. … X. Guarantee: Repealed. XI. INDEVAL: Repealed. … XIV. SAGAPL: Repealed. XV. SIAC-BANXICO: Repealed. XVI. SUBCAM-BANXICO: the Foreign Exchange Auction System of the Bank of Mexico that allows credit institutions to submit the bids referred to in these Rules through the Bank of Mexico Account Holder Attention System (SIAC-BANXICO) in accordance with the contract entered into with the Bank of Mexico. … XX. Settlement Exchange Rate: the Exchange Rate that will be used as a reference in accordance with what is provided in these Rules, and that corresponds: (i) to that called “WM/Refinitiv London 4 pm Closing Spot Rate”, made known by the foreign information service provider company, called Refinitiv, corresponding to the Banking Business Day on which the term of the Foreign Exchange Hedge in question matures, or (ii) to the Exchange Rate that the Bank of Mexico determines in substitution and makes known through the address <http://webdgobc>. … XXII. UDI: Repealed. … XXIII. Securities: Repealed.”

… “5th. Requirements to submit bids in Auctions.- Credit institutions interested in participating in the Auctions must grant the Bank of Mexico a mandate by which, on the one hand, they manifest their agreement to be subject to the terms and conditions applicable to Foreign Exchange Hedge operations they enter into in accordance with these Rules, and on the other hand, authorize the Bank of Mexico to make charges or credits to the Single Account that are necessary in accordance with what is provided in these Rules. The aforementioned mandate must be presented to the Operations Management Department, prepared in a format substantially equal to that provided in Annex 1 BIS of these Rules, duly signed by the legal representative of the credit institution in question. For the purposes of the foregoing, credit institutions must present to the Instrumentation of Operations Department a certified copy and a simple copy of the deed in which the powers to exercise acts of domain granted to the persons who sign the respective mandate on behalf of the corresponding credit institution are recorded, as well as a simple copy of the official identifications issued by some federal authority of said persons.”

Monday, August 9, 2021 OFFICIAL GAZETTE 3 Operations a certified copy and a simple copy of the deed in which the powers to exercise acts of domain granted to the persons who sign the respective mandate on behalf of the corresponding credit institution are recorded, as well as a simple copy of the official identifications issued by some federal authority of said persons.”

“8th. Limits of bids.- For traditional Auctions referred to in the 6th, subsection a), of these Rules, the sum of the amounts of the bids presented by the same Bidder Institution in the same Auction must not exceed the total amount that the Bank of Mexico indicates in the call for said Auction as corresponding to the total Foreign Exchange Hedges that can be assigned.”

“9th. Submission of bids.-… … In the event that bids cannot be submitted through SUBCAM-BANXICO, the Bank of Mexico, in an extraordinary manner, will authorize that they be submitted, within the established schedule for the holding of the corresponding Auction, by telephone communication with the staff of the Sub-department of National Exchange or through any other authorized electronic, computing or telecommunications medium for such effect by the Bank of Mexico, as it makes known to Bidder Institutions on their opportunity. Bidder Institutions that submit bids under the supposition of this paragraph must confirm their bids in writing addressed to the National Operations Department of the Bank of Mexico presented in a closed envelope, no later than 17:00:00 hours of the same Banking Business Day indicated in the call for the respective Auction, in a format substantially equal to that attached to these Rules as Annex 2 or Annex 2 BIS, as applicable, accompanied by a cover letter for each call for the Auction in question. … The Bank of Mexico reserves the right not to accept bids presented by those credit institutions that have failed to pay any obligation due to it arising from the celebration of Foreign Exchange Hedges in terms of these Rules and in favor of the Bank of Mexico in the last twelve months.”

“10th. Effects of bids.- The submission of bids that Bidder Institutions make in the respective Auctions will constitute the record of their consent to celebrate the Foreign Exchange Hedges subject to said Auctions and to obligate themselves before the Bank of Mexico in the terms and under the conditions established in these Rules and in the respective calls. In turn, the assignment of the Foreign Exchange Hedges that the Bank of Mexico carries out in each Auction perfects said Foreign Exchange Hedges at the moment when the latter makes known the referred assignment to the corresponding Assigned Institutions and, consequently, the latter will be obliged to make the payments that, if any, result from said operations, as well as to comply with the other related obligations, in terms of these Rules.”

… 11th. Assignment criteria.-… I. … … “In the event that two or more Bidder Institutions present their bids with the same Exchange Rate and that, in accordance with the order indicated in the previous paragraph, they remain in the last place of assignment to cover the total amount offered by the Bank of Mexico in the respective Initial Auction, such that the total amounts of the bids with higher Exchange Rates do not reach to cover said offered amount, but that the sum of the amounts of said last bids exceeds this last amount, the assignment of these last ones will be made pro rata according to the amount indicated in said bids, when it is a traditional Initial Auction, or according to the order in which they were received when the corresponding Initial Auction is interactive, in accordance with what is indicated in the 6th of these Rules. II. … …

4 OFFICIAL GAZETTE Monday, August 9, 2021 In the event that two or more Bidder Institutions present their bids with the same Forward Differential Currency Units and that, in accordance with the order indicated in the previous paragraph, they remain in the last place of assignment to cover the total amount offered by the Bank of Mexico in the respective Maturity Auction, such that the total amounts of the bids with higher Forward Differential Currency Units do not reach to cover said offered amount, but that the sum of the amounts of said last bids exceeds this last amount, the assignment of these last ones will be made pro rata according to the amount indicated in said bids, when it is a traditional Maturity Auction, or according to the order in which they were received when the corresponding Maturity Auction is interactive, in accordance with what is indicated in the 6th of these Rules. In the event that, during the period between the submission of bids and the moment when the Bank of Mexico makes known the result of the Auctions, failures occur in the systems used for such effect, the Auction will be declared void, even in the case where the Bank of Mexico has received bids. In this supposition, the Bank of Mexico will call for a new Auction on the same day, by the same medium or, in the absence of provision of this, by any other electronic, computing or telecommunications medium authorized for such effect by the Bank of Mexico and made known to credit institutions.”

12th. Bis. Calculation of the Assignment Exchange Rate corresponding to Maturity Auctions.- … “For the purposes of the settlement and early maturity provided for in Chapters V and VI of these Rules, respectively, Assigned Institutions that celebrate Foreign Exchange Hedges as a result of Maturity Auctions must use as the Assignment Exchange Rate that which the Bank of Mexico determines in accordance with the previous paragraph and makes known to the Assigned Institutions for such effect through the address <<http://webdgobc >>.”

“13th. Calculation of the daily settlement amount.- The settlement of each Foreign Exchange Hedge celebrated by an Assigned Institution will be made each Banking Business Day in accordance with what is provided in this Rule, as well as at the maturity of the Foreign Exchange Hedge, in accordance with the following 14th Rule. For the purposes of the daily settlement referred to in the previous paragraph, first, the Bank of Mexico will calculate, on each Banking Business Day, the present value of each of the Foreign Exchange Hedges celebrated by each Assigned Institution that are in force on that date, as the equivalent result of applying the following formula: Where: The amount equivalent to the value of those Foreign Exchange Hedges calculated in accordance with the previous formula, when the Assignment Exchange Rate is greater than the Revaluation Exchange Rate, will correspond to the amount that the respective Assigned Institution owes to the Bank of Mexico and, on the other hand, in the event that the Assignment Exchange Rate is less than the Revaluation Exchange Rate, the referred amount will correspond to that which the own Assigned Institution has the right to receive. Once the Bank of Mexico carries out the calculation referred to in the previous paragraph, for each Foreign Exchange Hedge celebrated by the same Assigned Institution, it will calculate the net added value of all the Foreign Exchange Hedges celebrated by said Assigned Institution that are in force, as follows: Where:

Monday, August 9, 2021 OFFICIAL GAZETTE 5 The amount of the daily settlement, calculated on each Banking Business Day, for each Assigned Institution will be calculated as: Where: In the event that the amount equivalent to MLDt resulting from the previous formula is an amount greater than zero, said amount will correspond to that which the Assigned Institution will have the right to receive from the Bank of Mexico, to carry out the daily settlement, on date t, of all the Foreign Exchange Hedges in force on that date, celebrated by said Assigned Institution. Likewise, in the event that the amount equivalent to MLDt resulting from the previous formula is an amount less than zero, said amount will correspond to that which the Assigned Institution must pay to the Bank of Mexico, to carry out the daily settlement, on date t, of all the Foreign Exchange Hedges in force on that date, celebrated by said Assigned Institution. Except for what is provided in the following 14th Rule, the Banking Business Day following that in which the settlement amount referred to in this Rule is determined, the Bank of Mexico will make the charge or credit, as applicable, in national currency, of the resulting settlement amount, in the Single Account of said Assigned Institution, subject to what is established for such effect in the “Provisions applicable to the operations of credit institutions, multiple-object financial societies regulated that maintain equity links with credit institutions and the National Financial Development Agency for the Agricultural, Rural, Forestry and Fishing Sector”, issued by the Bank itself through Circular 3/2012, as modified in accordance with the respective resolutions issued subsequently.”

“14th. Settlement at maturity.- The second Banking Business Day following that which corresponds to the maturity date of each Foreign Exchange Hedge celebrated by each Assigned Institution, the Bank of Mexico, in accordance with the authorization referred to in the 5th of these Rules, will make the charge or credit, as applicable, in national currency, of the resulting settlement amount from the calculation carried out on that same maturity date in accordance with the previous Rule in the Single Account of said Assigned Institution, subject to what is established for such effect in the “Provisions applicable to the operations of credit institutions, multiple-object financial societies regulated that maintain equity links with credit institutions and the National Financial Development Agency for the Agricultural, Rural, Forestry and Fishing Sector”, issued by the Bank itself through Circular 3/2012, as well as the modifications to said provisions issued subsequently.”

… “CHAPTER VI EARLY MATURITY”

“15th. Determination of the value of Foreign Exchange Hedges.- Repealed.”

6 OFFICIAL GAZETTE Monday, August 9, 2021 “16th. Guarantees of obligations due from Assigned Institutions.- Repealed.” “17th. Procedure for substitution of Securities.- Repealed.” “18th. Withdrawal of excess guarantees.- Repealed.” “19th. Credit of accessories.- Repealed.” “20th. Early maturity.- The Bank of Mexico reserves the right to terminate, in advance, some or all of the Foreign Exchange Hedges celebrated with an Assigned Institution, in the event that this does not have sufficient balance in its Single Account to carry out the settlement of the amounts due to it in accordance with the previous 13th Rule, without prejudice to the overdraft in said account that, if any, may occur in accordance with applicable provisions. In this supposition, the Bank of Mexico will send a written communication to the Assigned Institution that is part of that Foreign Exchange Hedge, with at least one Banking Business Day in advance of the date on which the respective Foreign Exchange Hedges must be terminated early. In the event that the Bank of Mexico terminates early the Foreign Exchange Hedges referred to in this Rule, it will determine the settlement amounts in accordance with what is provided in the 13th of these Rules taking as the maturity date that corresponding to the early termination.”

“22nd. Assignment of rights and obligations.- Assigned Institutions may not assign the rights and obligations they acquire as part of the operations referred to in these Rules.”

“23rd. Operations with the public. Credit institutions that celebrate the Foreign Exchange Hedge operations referred to in these Rules must be subject, among others, to the applicable regulations on the foreign exchange risk position and investment regime included in the “Provisions applicable to the operations of credit institutions, multiple-object financial societies regulated that maintain equity links with credit institutions and the National Financial Development Agency for the Agricultural, Rural, Forestry and Fishing Sector”, issued by the Bank of Mexico through Circular 3/2012, as modified in accordance with the respective resolutions issued subsequently.”

… ANNEX 1 DETERMINATION OF THE REVALUATION EXCHANGE RATE “The Revaluation Exchange Rate calculated on the date for an operation with a maturity date is: where: Identifier USDMXNFIX=WM : Forward Differential Currency Units on the day with Maturity calculated based on the information published according to the following identifier 1 : Identifier Example for 1 month USDMXN[term]FIX=WM USDMXN1MFIX=WM

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Monday, August 9, 2021 OFFICIAL GAZETTE 7 1 Corresponds to that known as “WM/Refinitiv London 4 pm Closing Spot Rate”, made known by the foreign service provider company, named Refinitiv. Banco de México may modify, if necessary, both the source of information and the references used for the calculation of the Revaluation Exchange Rate; such modification will be made known through the address <http://webdgobc>.” “ANNEX 1 BIS MODEL OF MANDATE IN FAVOR OF THE BANK OF MEXICO TO CARRY OUT CHARGES AND CREDITS TO THE UNIQUE ACCOUNT DERIVED FROM FOREIGN EXCHANGE COVER AUCTIONS (PAPER WITH LETTERHEAD OF THE CREDIT INSTITUTION) Mexico City, on __ of ____. BANK OF MEXICO MANAGEMENT OF OPERATIONS MANAGEMENT Avenida 5 de Mayo number 6, Colonia Centro, Mexico City, C.P. 06000. Present. By this channel, (FULL NAME OF THE CREDIT INSTITUTION, INCLUDING, IF APPLICABLE, THE FINANCIAL GROUP TO WHICH IT BELONGS) expresses its conformity to enter into Foreign Exchange Covers in the form, terms and under the conditions established in the “Rules for Foreign Exchange Cover Auctions”, contained in Circular 3/2017, as well as in the respective calls for bids, and recognizes that the bids it may present are mandatory and irrevocable for said institution and will produce the broadest effects corresponding in law. Additionally, it accepts that all acts carried out in the name of the credit institution in the Bank of Mexico Foreign Exchange Auction System (SUBCAM) and the Bank of Mexico Account Holder Attention System (SIAC-BANXICO) are attributable and will be mandatory for (FULL NAME OF THE CREDIT INSTITUTION INCLUDING, IF APPLICABLE, THE FINANCIAL GROUP TO WHICH IT BELONGS). To this effect, (FULL NAME OF THE CREDIT INSTITUTION INCLUDING, IF APPLICABLE, THE FINANCIAL GROUP TO WHICH IT BELONGS) hereby authorizes and instructs the Bank of Mexico to carry out all charges and credits in the national currency account designated as the Unique Account of this institution that result in accordance with what is established in Articles 13th and 14th of the Rules. Finally, in compliance with what is provided in said Rules, (FULL NAME OF THE CREDIT INSTITUTION, INCLUDING, IF APPLICABLE, THE FINANCIAL GROUP TO WHICH IT BELONGS) requests that this Central Institute accredit the persons who will act as operators, to enter bids for the Auctions, as indicated below: 1.- 2.- 3.- Sincerely, (FULL NAME OF THE CREDIT INSTITUTION) (NAME AND SIGNATURE OF THE REPRESENTATIVE OF THE CREDIT INSTITUTION WITH DOMINION POWERS)” ANNEX 2 MODEL OF CONFIRMATION OF BIDS PRESENTED TO PARTICIPATE IN THE INITIATION AUCTION OF FOREIGN EXCHANGE COVERS “(LETTERHEAD OF THE CREDIT INSTITUTION) Mexico City, on __ of ____.

8 OFFICIAL GAZETTE Monday, August 9, 2021 “BANK OF MEXICO NATIONAL OPERATIONS MANAGEMENT Avenida 5 de Mayo number 6, Colonia Centro, Mexico City, C.P. 06000. Present.” … ANNEX 2 BIS MODEL OF CONFIRMATION OF BIDS PRESENTED TO PARTICIPATE IN THE MATURITY AUCTION OF FOREIGN EXCHANGE COVERS (LETTERHEAD OF THE CREDIT INSTITUTION) Mexico City, on __ of ____. “BANK OF MEXICO NATIONAL OPERATIONS MANAGEMENT Avenida 5 de Mayo number 6, Colonia Centro, Mexico City, C.P. 06000. Present.” … “ANNEX 3 VALUATION OF SECURITIES Repealed.” “ANNEX 4 COMMUNICATION TO THE OPERATIONS MANAGEMENT DEPARTMENT TO REQUEST THE SEGREGATION OF DEPOSITS IN THE COLLATERAL ACCOUNT FOR FOREIGN EXCHANGE COVERS Repealed.” “ANNEX 5 COMMUNICATION TO THE OPERATIONS MANAGEMENT DEPARTMENT TO REQUEST THE SUBSTITUTION OF SECURITIES Repealed.” “ANNEX 6 COMMUNICATION TO THE OPERATIONS MANAGEMENT DEPARTMENT TO REQUEST THE RETURN OF SECURITIES Repealed.” “ANNEX 7 COMMUNICATION TO THE OPERATIONS MANAGEMENT DEPARTMENT TO REQUEST THE TERMINATION OF THE GUARANTEE CONSTITUTED ON THE DEPOSITS Repealed.” TRANSITORY PROVISIONS FIRST. This Circular shall enter into force fifteen Banking Business Days after its publication in the Official Gazette of the Federation. SECOND. Acts and operations derived from foreign exchange covers that are in force on the date of entry into force of this Circular, shall be governed by the terms and conditions established in the Rules for Foreign Exchange Cover Auctions, made known by the Bank of Mexico through Circular 3/2017, published in the Official Gazette of the Federation on February 24, 2017 and its modifications, whose text is in force prior to the publication of this Circular. To this effect, pledge and stock pledge contracts to guarantee foreign exchange cover operations entered into between credit institutions and the Bank of Mexico in terms of Article 5th of said Rules, shall maintain their validity until the total fulfillment of the obligations derived from the operations celebrated under their auspices.

Monday, August 9, 2021 OFFICIAL GAZETTE 9 THIRD. Credit institutions that intend to participate in the Foreign Exchange Cover Auctions under the terms provided in these Rules, must send to the Bank of Mexico the communication referred to in Annex 1 Bis with an advance of, at least, three Banking Business Days before the date on which the respective credit institution intends to participate in the Auction in question. Mexico City, on August 2, 2021.- BANK OF MEXICO: General Legal Director, Luis Urrutia Corral.- Initials.- Director of National Operations, Juan Rafael García Padilla.- Initials. For any inquiry regarding the content of this Circular, the Bank of Mexico places itself at your disposal through the Direction of Authorizations and Sanctions of Central Banking at telephone (55) 5237-2000 extension 3200.