Circular 56/2008 — Rules for Interest Rate Swap Auctions

"2008, Year of Physical Education and Sport"
CIRCULAR 56/2008
Mexico, D.F. on November 10, 2008.
TO CREDIT INSTITUTIONS:
SUBJECT: RULES FOR INTEREST RATE SWAP AUCTIONS

The Bank of Mexico, based on what is provided in Article 28 of the Political Constitution of the United Mexican States, sixth and seventh paragraphs; 7th fraction X, 8th and 14 of the Bank of Mexico Law; 22 of the Law for Transparency and Ordering of Financial Services; 8th paragraphs third and sixth; 10, 17, fraction I and 19, fraction IX of the Internal Regulations of the Bank of Mexico, which provide for the attribution of the Central Bank, through the Directorate of Central Banking Provisions and the Directorate of Operations, respectively, to participate in the issuance of provisions; Unique of the Agreement on the Affiliation of the Administrative Units of the Bank of Mexico, fractions I and IV, with the objective of continuing to implement measures to promote the healthy development of the financial system, in order to reduce the risks in which those institutions may incur due to the interest rate structure of their active and passive operations, has resolved to issue the following:

"RULES FOR INTEREST RATE SWAP AUCTIONS"

1. DEFINITIONS
   For the purposes of these Rules, the following shall be understood, in singular or plural:

Settlement Date: the date corresponding to every 28 days counted from the start date of the Swap. In the event that such date corresponds to a non-banking business day, the aforementioned term shall be adjusted to the next closest banking business day.

Collateral: the Securities that credit institutions must deliver to the Bank of Mexico to guarantee the Swaps

celebrated with said Bank and whose amount is calculated based on the daily valuation of such operations.

Periodic Settlement: the amount owed to or in favor of the Bank of Mexico or the credit institution whose bids have received allocation in the Auctions, resulting from comparing the Fixed Nominal Interest Rate and the Variable Nominal Interest Rate, on each Settlement Date.

Reference Amount: the amount expressed in multiples of ten million pesos, indicated in the bids that have received allocation in the Auctions, based on which the Periodic Settlements will be determined.

Fixed Nominal Interest Rate: the one corresponding to the bids that have received allocation in the Auctions, in accordance with what is provided in item 6 of these Rules, expressed in percentage points with three decimals, based on which the Periodic Settlement that, if applicable, the credit institution must pay to the Bank of Mexico will be calculated.

Variable Nominal Interest Rate: the Interbank Equilibrium Interest Rate in National Currency (TIIE), for the 28-day term, which the Bank of Mexico publishes in the Official Gazette of the Federation on the banking business day following the date of the Auction or Settlement Date, as applicable, based on which the Periodic Settlement that, if applicable, the Bank of Mexico must pay to the credit institution in question will be calculated.

Auction: the Swap Auction carried out in accordance with what is provided in these Rules.

Swap: the derivative operation whose object is the exchange of money flows resulting from the comparison of Fixed Nominal Interest Rates and Variable Nominal Interest Rates, in which credit institutions refer their bids to the rates mentioned in the first term.

Securities: the Treasury Certificates of the Federation (CETES), excluding those issued under credit restructuring programs in investment units (SPECIAL CETES); the Federal Government Development Bonds denominated in national currency (BONDES) and those denominated in investment units (UDIBONOS); the Monetary Regulation Bonds issued by the Bank of Mexico (BREMS), and the Savings Protection Bonds issued by the Institute for the Protection of Bank Savings (BPAS).

2. BIDDERS
   Only credit institutions may submit bids.
   The Bank of Mexico will not accept bids from the aforementioned persons when, in its judgment, they fail to comply with applicable provisions or do not conform to sound market uses or practices.

It shall be the responsibility of multiple banking institutions and development banking institutions to ensure proper compliance with the requirements for the celebration of derivative operations provided for in Circular 4/2006 or in Annex 17 of Circular 1/2006, respectively, for the submission of bids.

3. CALLS FOR BIDS
   The Bank of Mexico will inform bidders of the calls for Auctions two banking business days before the date on which they are held, starting at 12:00:00 hours, through its electronic page on the worldwide network (Internet) identified by the domain name: www.banxico.org.mx or through any other electronic, computing, or telecommunication medium authorized for this purpose by the Bank of Mexico, unless the Bank announces another date or time for a particular call.

Such calls will inform the characteristics of the Auctions.

4. TYPES OF AUCTIONS
   The Auctions may be:
   a) Single interest rate: those in which all bids will be assigned to the same Fixed Nominal Interest Rate, and will be accepted starting from the minimum fixed nominal interest rate that, if applicable, the Bank of Mexico determines in accordance with item 11.2 of these Rules. b) Multiple interest rate: those in which bids will be assigned to the specific Fixed Nominal Interest Rate indicated by the bidder in the bid itself and will be accepted starting from the minimum fixed nominal interest rate that, if applicable, the Bank of Mexico determines in accordance with the aforementioned item 11.2.

5. BIDS
   5.1 Types of bids
   Bids shall be competitive and must indicate: a) the Fixed Nominal Interest Rate, expressed up to three decimals, at which the bidder is willing to celebrate each Swap, and b) the total nominal amount of each bid, in amounts expressed in millions of pesos.

5.2 Bid Limits
The sum of the amounts of the bids submitted by each bidder, for each call, shall not exceed the maximum amount of Swaps that the Bank of Mexico is willing to celebrate with bidders.

5.3 Submission of Bids
Each bidder may submit one or more bids regarding the same call.

Interested parties must submit their bids on the date and time indicated in the respective call, through the Bank of Mexico's Account Holder Attention System (SIAC-BANXICO), or through any other electronic, computing, or telecommunication medium authorized for this purpose by the Bank of Mexico, or in requests they prepare in accordance with the model attached as an Appendix to these Rules.

The access, identification, and, if applicable, operation keys established for the use of electronic, computing, or telecommunication media will substitute the autograph signature with an electronic one, so that documentary or technical records where they appear will produce the same effects that laws grant to documents signed by the parties and, consequently, will have equal probative value.

Bids submitted in accordance with the aforementioned model must be delivered to the National Operations Management of the Bank of Mexico in a closed envelope accompanied by a submission letter. Both documents must be signed by the same representatives duly authorized by the bidder, and the letter must show the signature knowledge granted by the Bank of Mexico's Cash Account Operations Office, so that said signatures must be registered in the said Office.

5.4 Effects of Bids
Bids submitted to the Bank of Mexico in terms of item 5.3 of these Rules will produce the broadest effects corresponding in law and will imply the bidder's acceptance of all and each of these Rules, as well as the terms and conditions established in the call in which the Bank of Mexico communicates the particular characteristics of the Auction, and the authorization of the credit institution whose bids receive allocation to carry out the corresponding charges and credits in its Unique Account.

Every bid will be mandatory for the bidder who submits it and will be irrevocable.

The Bank of Mexico may invalidate the bids it receives if they do not conform to these Rules or to what is stated in the corresponding call; are not clearly legible; have erasures or corrections; or are incomplete or incorrect in any way.

Likewise, the Bank of Mexico may reject bids if, in its judgment, the participation of such bids, due to their characteristics, could produce inconvenient effects on the healthy development of the financial market in general.

6. ALLOCATION
   In the Auction, bids will be allocated according to the descending order of the corresponding Fixed Nominal Interest Rates, without exceeding the maximum amount offered in the call.

When Auctions are at a single interest rate, bids will be assigned to the Fixed Nominal Interest Rate corresponding to the last bid that receives allocation, even if it has not been fully attended in its amount.

In the case of Multiple Interest Rate Auctions, bids will be assigned to the Fixed Nominal Interest Rate indicated in each of these bids.

7. RESULTS
   The Bank of Mexico will inform each bidder individually through SIAC-BANXICO, no later than sixty minutes after the deadline for the submission of bids, the Reference Amount and the Fixed Nominal Interest Rate of the Swaps celebrated with that bidder.

Likewise, it will make available to all bidders through its electronic page or through any other electronic, computing, or telecommunication medium that the Bank of Mexico determines for this purpose, no later than sixty minutes after the deadline for the submission of bids, the general results of the Auction.

In the event that, due to force majeure or unforeseen circumstances, the results of the Auction cannot be made known in accordance with what is stated in this item, the Bank of Mexico will timely communicate the applicable procedure to make such results known.

8. PERIODIC SETTLEMENTS
   The comparison of the Fixed Nominal Interest Rates and the Variable Nominal Interest Rates, as well as the determination of the Periodic Settlement, will be carried out using the formula contained in the Annex of these Rules.

The resulting amounts will be credited or charged to the Unique Account of the respective credit institution, as applicable.

9. VALUATION AND COLLATERAL
   The Bank of Mexico will determine daily the market value of the Swaps that have been celebrated with credit institutions whose bids have received allocation and, if it deems it necessary, will require said institutions to deliver Collateral.

The vector of prices of the Securities that can be given as Collateral and their respective discount factors will be made known to credit institutions through the Collateral and Reporting Administration System (SAGAPL). The discount factor will be the one corresponding to operations with a term of one day.

The Bank of Mexico may at any time require bidders to constitute the Collateral it considers necessary to cover the amounts in its favor derived from the valuation of the allocated Swaps.

Such Collateral will be constituted via stock pledge without transfer of ownership and must be deposited in the corresponding account at the S.D. Indeval, Institution for the Deposit of Securities, S.A. de C.V. (Indeval), no later than 15:30:00 hours on the banking business day following the day the credit institution receives the corresponding notice.

In the event that Collateral is not constituted within the established term, the Bank of Mexico will charge each day of delay in the Unique Account of the defaulting bidder by way of conventional penalty, the equivalent to one percent of the uncollateralized amount and reserves the right to accelerate the operation that has not been fully collateralized, in terms of item 10 of these Rules.

For the purposes of the preceding paragraph, interested institutions participating in the Auctions must celebrate a contract with the Bank of Mexico establishing the terms and conditions for the constitution of Collateral, for which they must present to the Sub-Management of National Operations Instrumentation, a certified and simple copy of the deed in which the powers of its representative to exercise acts of dominion are stated, as well as a simple copy of the official identification(s) of the person(s) who intend(s) to sign the said contract.

The Bank of Mexico will inform credit institutions when, due to variations in the valuation of Swaps and/or Collateral, there is availability of the amounts granted in Collateral for credit institutions that so decide to request their return.

10. EARLY MATURITY
    The Bank of Mexico may terminate any Swap early once 180 natural days have elapsed counted from the start date of the operation, for which it will send a written communication to the corresponding credit institution with at least one banking business day of advance notice to the date on which it is desired to terminate the operation. This term will not be applicable in the case provided for in the last part of the fourth paragraph of the previous item.

Likewise, credit institutions, once 180 natural days have elapsed from the start of the Swap, may request early maturity from the Bank of Mexico at market prices, reserving the latter the right to accept or reject such requests.

Early maturity will be carried out seeking that price formation in the market is not affected, for which it will be ensured that the sum of the amounts of Swaps to be terminated early each banking business day does not exceed 5% of the total sum of the Reference Amounts that have received allocation.

The early maturity process will be carried out as follows:
a) The Bank of Mexico will determine the market value of the Swap on the day it sends the communication or receives the request in question; b) The resulting amount will be credited or charged to the Unique Account of the respective credit institution, as applicable, on the next banking business day, and c) The Bank of Mexico will request Indeval to release the corresponding Collateral, when the debts derived from the early maturity of the Swaps have been fully covered.

11. GENERAL PROVISIONS
    11.1 In the event of tied bids and the amount to be allocated is not sufficient to attend such bids, they will be attended pro rata with respect to their amount.

11.2 The Bank of Mexico may determine in any single or multiple interest rate Auction, the minimum fixed nominal interest rate at which it is willing to celebrate the Swaps subject to the Auction. In these cases, bids with lower rates will not be attended.

11.3 The Bank of Mexico may declare any Auction completely void, in which case no bid will receive allocation.

11.4 For market information, the Bank of Mexico will make known to the general public the characteristics of the Auctions, through its Internet electronic page or through any other electronic, computing, or telecommunication medium authorized for this purpose by the Bank of Mexico itself.

11.5 All times referred to in these Rules are referenced to the time zone of Mexico City, Federal District.

11.6 In the event that, due to force majeure or unforeseen circumstances, the calls or results of the Auctions cannot be made known in accordance with what is stated in items 3 and 7 of these Rules, respectively, the Bank of Mexico will timely communicate the applicable procedure to make such calls or the results of the corresponding Auctions known.

11.7 Credit institutions may not assign the Swap operations carried out in accordance with what is provided in these Rules.

ANNEX
Periodic Settlement = M (if – iv) * d/360
Where:
M = Reference Amount.
If = Fixed Nominal Interest Rate.
Iv = Variable Nominal Interest Rate. d = 28 days or in the event that the resulting day corresponds to a non-banking business day, the next closest banking business day.
If the Periodic Settlement is greater than zero, the Bank of Mexico will charge the Unique Account of the respective credit institution for said amount.
If the Periodic Settlement is less than zero, the Bank of Mexico will credit the Unique Account of the respective credit institution for said amount.

APPENDIX
MODEL REQUEST TO PARTICIPATE IN INTEREST RATE SWAP AUCTIONS Mexico, D.F., on __ of ____ of 20__.
Bidder Name: _____________________________
Bidder Key at the Bank of Mexico: _____________________________ BIDS:
Fixed Nominal Interest Rate Amount
.___ __________ millions of pesos .___ __________ millions of pesos .___ __________ millions of pesos

INTEREST RATES must be expressed up to THREE decimals.
The cited bids are mandatory and irrevocable; they will produce the broadest effects corresponding in law and imply our acceptance of all and each of the "Rules for Interest Rate Swap Auctions" in force, as well as the terms and conditions of the call dated ____ of _____________ of 2008.

Sincerely,
(Bidder's Name)
(Name and signature of authorized officials)

NOTE: Unused spaces must be cancelled.

TRANSITORY PROVISIONS
FIRST.- This Circular will enter into force on November 11, 2008.
SECOND.- Institutions interested in participating in the Auctions may celebrate the contract referred to in the sixth paragraph of item 9 of these Rules, no later than November 28 next.