Circular 6/2023 — Modifications to Circular 4/2012

Thursday, June 15, 2023 OFFICIAL GAZETTE 1
BANK OF MEXICO
CIRCULAR 6/2023 addressed to Credit Institutions, Brokerage Houses, Investment Funds, Multiple-Object Financial Societies that have equity links with Multiple Banking Institutions, General Warehouses of Deposit, Insurance Institutions and the National Financial Development Agency for Agriculture, Rural, Forest and Fisheries, regarding the modifications to the Rules for the Execution of Derivative Operations (Circular 4/2012).

At the margin a logo, which says: Bank of Mexico.- “2023, Year of Francisco Villa, the revolutionary of the people”.

CIRCULAR 6/2023
TO CREDIT INSTITUTIONS, BROKERAGE HOUSES, INVESTMENT FUNDS, MULTIPLE-OBJECT FINANCIAL SOCIETIES THAT HAVE EQUITY LINKS WITH MULTIPLE BANKING INSTITUTIONS, GENERAL WAREHOUSES OF DEPOSIT, INSURANCE INSTITUTIONS AND THE NATIONAL FINANCIAL DEVELOPMENT AGENCY FOR AGRICULTURE, RURAL, FOREST AND FISHERIES:
SUBJECT: MODIFICATIONS TO THE RULES FOR THE EXECUTION OF DERIVATIVE OPERATIONS (CIRCULAR 4/2012)

The Bank of Mexico, with the objective of continuing to promote the sound development of the financial system, has considered it convenient to expand the type of counterparties with which credit institutions may enter into credit derivative transactions. Consequently, such institutions may enter into credit derivative transactions with brokerage houses, investment funds, foreign hedge funds, specialized investment societies for retirement funds, insurance institutions and other institutional investors whose regimes allow it, limited to credit default derivatives (Credit Default Swaps) and total return derivatives (Total Return Swaps).

For the above, based on articles 28, paragraphs sixth and seventh, 2, 3, fraction I, 24, 26 and 36 of the Bank of Mexico Law, 46, fraction XXV, and 48 of the Credit Institutions Law, 176, first paragraph, of the Securities Market Law, 15, second paragraph, of the Investment Funds Law, 11 Bis 2, fraction XII, and 87-D, fourth paragraph, of the General Law of Organizations and Auxiliary Credit Activities, 6, second paragraph, of the Organic Law of the Federal Mortgage Society, 9, second paragraph, of the Organic Law of the National Bank of Foreign Trade, 9, second paragraph, of the Organic Law of the Banco del Bienestar, 8, second paragraph, of the Organic Law of the National Bank for the Army, Air Force and Navy of Mexico, 10, second paragraph, of the Organic Law of the National Bank of Public Works and Services, 22, first paragraph, of the Law for Transparency and Ordering of Financial Services, 4, first paragraph, 8, paragraphs fourth and eighth, 10, first paragraph, 12, first paragraph, in relation to 19 Bis, fraction V, 14, first paragraph, in relation to 25 Bis, fraction VII, 14 Bis 1, first paragraph, in relation to article 25 Bis 1, fraction IV, 17, fraction I, and 20 Quáter, fraction IV, of the Internal Regulations of the Bank of Mexico, which grant it the authority to issue provisions through the General Directorate of Central Banking Operations, General Directorate of Financial Stability, General Directorate of Financial System Affairs, Directorate of Central Banking Provisions and Directorate of Policy and Studies of Payment Systems and Market Infrastructures, respectively, as well as Second fractions I, IV, VI, X, and XVII of the Agreement on the Assignment of Administrative Units of the Bank of Mexico, it has resolved to modify the definitions of “General Warehouses of Deposit”, “Brokerage Houses”, “Credit Default Derivatives”, “Total Return Derivatives”, “Foreign Financial Entities”, “Credit Event”, “Credit Institutions”, “Sofomes” and “Titles with Credit Linkage”, contained in numeral 1.1, the numerals 1.2, 2.1, 2.2, 2.3, 3.2, 3.3, 3.4, 4, 5.1, 6.1, 6.2.5.5, 10.5, 10.6, 12.1, 12.2, 12.3, and 13, add the definitions of “Hedge Funds” and “Insurance Institutions”, in numeral 1.1, as well as repeal the definitions of “Risk Asset”, “Protection Buyer”, “Credit Risk” and “Protection Seller”, contained in numeral 1.1, of the “Rules for the Execution of Derivative Operations”, issued by the Bank of Mexico through Circular 4/2012, to remain in the following terms:

RULES FOR THE EXECUTION OF DERIVATIVE OPERATIONS

1. GENERAL PROVISIONS

1.1 For the purposes of these Rules, without prejudice to the meanings that may correspond to the terms indicated below in other regulations, it will be understood, in singular or plural, by:

“Risk Asset: Repealed.”
…

“General Warehouses of Deposit:
a) legal entities authorized to be constituted and operate as such, in terms of what is provided in the General Law of Organizations and Auxiliary Credit Activities.”

“Brokerage Houses: legal entities authorized to organize and operate as such in terms of what is provided in the Securities Market Law.”
…

“Protection Buyer: Repealed.”
…

“Credit Default Derivative:
a) agreement entered into between a selling party and a buying party, pursuant to which, in the event that a Credit Event occurs, the parties are obligated to carry out the corresponding settlement in accordance with the method they agree upon for that purpose, which may include the payment by the seller to the buyer of a determined amount, in accordance with the stipulated method, or an in-kind settlement whereby the buyer delivers to the seller the title or security subject to the Credit Event, in exchange for the amount that the latter pays in accordance with the agreed calculation method. In turn, the buyer, in exchange for the seller's obligations, is obligated to make periodic payments in accordance with the calculation method agreed upon for that purpose. Likewise, pursuant to said agreement, the parties are obligated to make the stipulated payments in accordance with the agreed settlement method, regardless of the existence or amount of the credit exposure that the parties have with respect to the entity corresponding to the agreed Credit Event, as well as of the loss or damage that the buyer suffers by reason of the Credit Event or of presenting evidence of said loss or damage. In this regard, insurance contracts in the lines of credit or financial guarantee are not considered Credit Default Derivatives.”

“Total Return Derivative:
a) agreement entered into between a selling party and a buying party, pursuant to which the former is obligated to pay the latter the amounts corresponding to principal and interest payments, as the case may be, to which the specified Underlying gives rise and the relative difference in the value of said Underlying, multiplied by an agreed notional value, in the event that said value increases within a determined period. In turn, the buying party agrees to pay the selling party an amount established at the time of the agreement or amounts based on a fixed or variable agreed interest rate, as well as the relative difference in the value of the same Underlying multiplied by the value of the agreed notional, in the event that said value decreases within the agreed period. Likewise, pursuant to said agreement, the parties may agree that, in the event that a Credit Event occurs, the agreement shall be deemed terminated on the specified date and the parties shall carry out a settlement in accordance with the agreed method, which may include the payment by the seller to the buyer of a determined amount in accordance with the specified method or an in-kind settlement, pursuant to which the buyer delivers to the seller the instrument corresponding to the Underlying, in exchange for the amount that the latter pays in accordance with the agreed calculation method.” …

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“Foreign Financial Entities:
a) entities constituted in foreign jurisdictions, that are empowered by competent authorities to carry out, on a habitual basis, the financial operations they offer in said jurisdictions.”

“Credit Event: an event referred to a specific person who issues one or more debt securities or obligates themselves to the payment of one or more loans, mutuals or financings of any type and that, in turn, said event directly affects the financial condition or obligations of a financial nature of said person — including, by way of example, the declaration of bankruptcy or equivalent process, or the filing of its application or lawsuit, as the case may be, to the early maturity, or the situation that makes its declaration susceptible, of payment obligations by reason of some default; to the default in the payment of due obligations; to the repudiation, rejection or challenge of the validity of one or more payment obligations; to the declaration or imposition of a moratorium; to the restructuring of one or more payment obligations; to the act or declaration of a competent authority in accordance with the regulations on restructuring or resolution, or to the deterioration in its rating granted by some securities rating agency when this gives rise to a Credit Event— that, if it occurs, obliges the parties to a Credit Derivative Operation to comply with what is stipulated in the corresponding agreement.” …

“Hedge Funds: entities, including vehicles organized as trusts or similar figures, constituted in any of the foreign jurisdictions indicated below, whose main object is to carry out investments with resources contributed by the persons who participate in said entities for that purpose, as well as with resources coming from financings acquired for that purpose, with the aim of distributing among those persons the profits or, in their case, losses derived from said investments, and that are authorized or empowered to carry out said activities in the jurisdictions in which they operate. In this regard, the referred entities will be those constituted in countries of the European Union, in those that are members of the Organization for Economic Cooperation and Development (OECD) or those whose financial authorities are members of the Council of the international grouping of authorities responsible for the regulation of securities, known as the International Organization of Securities Commissions (IOSCO, by its acronym in English).” …

“Credit Institutions: multiple banking institutions authorized to organize and operate as such in terms of the Credit Institutions Law, as well as development banking institutions constituted in terms of said Law and their corresponding organic laws.”

“Insurance Institutions: legal entities authorized to organize and operate as such in terms of the Insurance and Surety Institutions Law.”
…

“Credit Risk: Repealed.”
…

“Sofomes: multiple-object financial societies, considered as such in accordance with the General Law of Organizations and Auxiliary Credit Activities, that maintain equity links with multiple banking institutions.”
…

“Titles with Credit Linkage:
a) credit titles, including fiduciary certificates, that document payment obligations on the part of their issuer until their maturity date or, in their case, a prior date in which a Credit Event occurs. At the maturity of these titles on the date determined therein, the payment of their nominal amount will become due. If the Credit Event occurs, said titles will be redeemed by delivering to their holders an amount lower than the nominal value, as determined in the title itself, or by delivering to their holders titles issued by the entity referred to in the Credit Event and that have become linked to the redeemed titles.”

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…

“Protection Seller: Repealed.”

“1.2 Entities, Investment Funds, General Warehouses of Deposit, Sofomes and Insurance Institutions may only carry out the Derivative Operations referred to in these Rules, for which they must be subject to the terms and conditions they contemplate.”

“2.1 Entities may only carry out Derivative Operations on the following Underlyings:
a) Shares or titles that secure a part of the capital of a legal entity, a group or basket of shares or of said titles, or titles referenced to shares or to the titles mentioned above that trade on a stock exchange; b) Price indices on shares or securities that trade on a stock exchange; c) National currency, Foreign Exchange and UDIS; d) Price indices referred to inflation; e) Nominal, real or super-interest rates, rates referenced to any debt title and indices based on said rates; f) Loans and credits, excluding subordinated obligations issued by any financial entity; g) Any of the following merchandise:
i) Gold and silver; ii) Corn, wheat, soy, sugar, rice, sorghum, cotton, oats, coffee, orange juice, cocoa, barley, milk, canola, soy oil and soy paste; iii) Pork meat, swine and cattle; iv) Natural gas, heating fuel, diesel, gasoline and crude oil, and v) Aluminum, copper, nickel, platinum, lead and zinc. h) Forward Operations, Forward Operations, Option Operations, Credit Derivative Operations and Swap Operations, on the Underlyings referred to in the preceding subsections.”

“2.2. Brokerage Houses may carry out Credit Derivative Operations, on their own account or for third parties, in terms of what is provided in these Rules.”

“2.3 Investment Funds, General Warehouses of Deposit, Sofomes and Insurance Institutions may only carry out Derivative Operations with Underlyings included in numeral 2.1 of these Rules that, according to their corporate purpose and, in their case, investment regime, are authorized to operate.”

“3.2 INVESTMENT FUNDS
Investment Funds may carry out Derivative Operations in any Market, without prejudice to the other provisions issued by the CNBV in matters of investment object assets applicable to Investment Funds.
Additionally, for the celebration of Derivative Operations, Investment Funds must have the respective LEI Codes issued in their name, which must be valid at the time of the celebration of the respective Derivative Operations.
Investment Funds may only celebrate Credit Derivative Operations to cover risks referred to Underlyings that consist of assets of their investment object in accordance with the Investment Funds Law and that said funds maintain in their equity during the validity of the respective Credit Derivative Operations.”

“3.3 SOFOMES, GENERAL WAREHOUSES OF DEPOSIT AND INSURANCE INSTITUTIONS Sofomes, General Warehouses of Deposit and Insurance Institutions may carry out Derivative Operations, on their own account only in those cases where said operations have as their purpose to cover their own risks.
For the purposes of the foregoing, Sofomes, General Warehouses of Deposit and Insurance Institutions must: i) have a risk administration and control unit or equivalent body responsible for valuing, measuring and following up such risks; ii) have an adequate valuation of the Derivative Operations and of the counterparty risk, determine the effectiveness of the coverage, according to the accounting criteria applicable to them, and submit these Derivative Operations to the respective risk committees or equivalent bodies for prior approval before their celebration, and iii) inform at least once every semester to their board of directors regarding the carrying out of these operations and their limits, including in said report the calculation on the effectiveness of the coverage. These operations may be carried out in any Market. Additionally, Sofomes, General Warehouses of Deposit and Insurance Institutions must have the respective LEI Codes issued in their name, which must be valid at the time of the celebration of the respective Derivative Operations.”

“3.4 OTHER DERIVATIVE OPERATIONS, ON OTHER UNDERLYINGS OR WITH A SETTLEMENT DATE DIFFERENT The Bank of Mexico may authorize Entities, Investment Funds, General Warehouses of Deposit, Sofomes and Insurance Institutions to carry out Derivative Operations: a) different from those indicated in subsection (i) of the definition of Derivative Operations, b) on Underlyings different from those indicated in numeral 2.1 or c) with a Settlement Date different from that established in numeral 7.4 of these Rules. For such effect, the interested parties must present a written authorization request to the Management where they describe, as the case may be, the Derivative Operation they intend to carry out, its structure or combination of Derivative Operations, the respective Underlying, or the Settlement Date they intend to establish. Regarding this, the subjects referred to in this paragraph must accompany a communication issued by their respective audit committee in terms of the last paragraph of numeral 3.1.1, as well as the audit report or opinion that has been presented to the audit committee or equivalent body, in which it is stated that the subject in question complies with what is established in Annex 1 of these Rules and in which it must clearly indicate the areas and procedures audited, as well as the different procedures that have been carried out for the verification of compliance with said requirements.”

“4. AUTHORIZED COUNTERPARTIES
Entities may carry out Derivative Operations with any person, except in the circumstances described in these Rules. For these purposes, Entities must have the respective LEI Codes issued in their name, which must be valid at the time of the celebration of the respective Derivative Operations.
Additionally, Entities, Investment Funds, Sofomes, General Warehouses of Deposit and Insurance Institutions, prior to the celebration of a Derivative Operation with any of the counterparties indicated below, must obtain from it their corresponding LEI Code valid at the time of said celebration:
a) Other Entities, Investment Funds, Sofomes, General Warehouses of Deposit, as well as Insurance Institutions, societies operating Investment Funds, specialized investment societies for retirement funds, regulated and unregulated multiple-object financial societies, credit unions, Hedge Funds, development agencies and Foreign Financial Entities, and b) Trusts, as well as legal entities other than Foreign Financial Entities, in the event that the notional amount of said Derivative Operation, added to those others of the other Derivative Operations valid at the time of the referred celebration that, in their case, that same counterparty has entered into with the financial institution in question, exceeds an amount equivalent in national currency to 35 million UDIS, calculated based on the value of the UDI of the day that corresponds. Entities may only carry out Derivative Operations in over-the-counter markets for the coverage of their own risks, in terms of numeral 3.1.5 of these Rules, with Entities authorized by the Bank of Mexico to celebrate Derivative Operations on their own account and with Foreign Financial Entities. Likewise, regarding Derivative Operations in Recognized Markets, the counterparty of the Derivative Operation must be the clearing house or, in their case, the foreign institution that acts as central counterparty, recognized by the Bank of Mexico in terms of numeral 7.6. Credit Institutions and the FND may celebrate Credit Derivative Operations only in those cases where their respective counterparties are other Credit Institutions authorized by the Bank of Mexico, in accordance with these Rules, to celebrate said Derivative Operations on their own account, or with Foreign Financial Entities or with Hedge Funds. Likewise, Credit Institutions may celebrate Credit Default Derivatives and Total Return Derivatives, as sellers, only in those cases where their respective counterparties are any of the following:
a) Brokerage Houses.

6 OFFICIAL GAZETTE Thursday, June 15, 2023

b) Investment Funds. c) Specialized Investment Companies for Retirement Funds. d) Insurance Institutions. e) Institutional Investors.

Additionally, in Credit Default Derivatives and Total Return Derivatives entered into by Credit Institutions with the financial entities mentioned in subsections a) to d) above, such counterparties may only enter into Credit Derivative Operations in those cases where they intervene as buyers and with respect to Underlyings that consist of assets which, in accordance with the provisions applicable to them, they maintain in their assets during the term of the respective Credit Derivative Operations. The Total Return Derivative Operations entered into in accordance with the above must be fully funded, that is, the buyer must deliver to the seller the payment of the agreed amount upon the celebration of the operation in exchange for receiving the flows from the Underlying and any increase in its value.

Investment Funds, General Warehouse Receipts Companies, Sofomes, and Insurance Institutions may enter into Derivative Operations in over-the-counter markets only in those cases where their counterparties are Entities authorized by the Bank of Mexico to enter into Derivative Operations on their own account or Foreign Financial Entities. Likewise, regarding Derivative Operations in Recognized Markets, the counterparty to the Derivative Operation must be the clearing house or, in its case, the foreign institution acting as central counterparty, recognized by the Bank of Mexico under section 7.6.

5. INSTRUMENTATION AND NEGOTIATION

“5.1 Derivative Operations, except for Credit-Linked Notes, that are entered into: (i) by Entities among themselves, as well as with other national or foreign financial entities and with Institutional Investors and Qualified Investors, and (ii) by Investment Funds, General Warehouse Receipts Companies, Sofomes, and Insurance Institutions with their authorized counterparties, shall be documented in master agreements, which must reflect guidelines and directives contained in contract models recognized in international markets, such as those approved by Recognized Markets or by the United States company named “International Swaps and Derivatives Association, Inc.”, provided that this does not contravene applicable national provisions.

Regarding Credit-Linked Notes and Structured Operations, these must be documented in an issuance deed, in a contract, or in a title in accordance with applicable provisions.

Entities that enter into Derivative Operations with clients other than those provided for in the first paragraph of this section must stipulate the applicable clauses under master agreements agreed upon with them.

Entities, Investment Funds, General Warehouse Receipts Companies, Insurance Institutions, and Sofomes must include the corresponding UPI in the information reports of the Derivative Operations they enter into in over-the-counter markets, in accordance with the terms established in section 12.4 of these Rules.

Entities, Investment Funds, General Warehouse Receipts Companies, Insurance Institutions, and Sofomes must include the corresponding UTI in the Confirmation of the Derivative Operations they enter into in over-the-counter markets.

The identifiers referred to in the two preceding paragraphs must comply with the terms and conditions provided in the “Rules applicable to the Unique Product Identifier (UPI) and the Unique Transaction Identifier (UTI) in derivative operations in over-the-counter markets”, issued through Circular 19/2022 of the Bank of Mexico or any other provisions that, in their case, replace them.

Derivative Operations, except for Credit-Linked Notes, and their characteristics may be agreed upon through the form that the corresponding master agreement establishes. Entities, Investment Funds, General Warehouse Receipts Companies, Sofomes, and Insurance Institutions must register such operations and invariably must send or make available to their counterparty the Confirmation, on the same day that they celebrate the respective Derivative Operation. Likewise, in case of not receiving the Confirmation from their counterparty on that same date, they must comply with the applicable requirements.

The obligation of Confirmation for Entities, Investment Funds, General Warehouse Receipts Companies, Sofomes, and Insurance Institutions provided for in the preceding paragraph will not be applicable when

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the Derivative Operations are negotiated in Recognized Markets subject to the procedures that these establish for such purposes.

In the event that, for the negotiation or Confirmation of Derivative Operations, the parties agree on the use of electronic, computing, or telecommunication means, they must specify the reciprocal identification keys and the responsibilities entailed by their use.

Entities, Investment Funds, General Warehouse Receipts Companies, Sofomes, and Insurance Institutions that enter into Non-Centrally Cleared Over-the-Counter Derivative Operations must provide for this type of Derivative Operations, among others, the following aspects:
a) Processes for verification with their counterparties (reconciliation), regarding the manner and terms according to which the valuation of this type of Derivative Operations entered into with such counterparties, as well as, in their case, the assets granted as collateral, will be carried out periodically; b) Mechanisms for the resolution of disputes that, in their case, arise with their counterparties, related to the execution of the verification processes referred to in the preceding subsection; c) The entity that will act as the calculation agent to carry out the valuation of this type of Derivative Operations, as well as, in their case, the entity that will act as the valuation agent for the assets granted as collateral, in accordance with subsection a) above; d) The methodology to determine the settlement amount of this type of Derivative Operations that are in effect, in the event of assignment of rights or early maturity of said Derivative Operations, and e) Procedures to periodically evaluate the possibility of carrying out regularly the compression of this type of Derivative Operations entered into with their counterparties.”

“6.1. GENERAL COLLATERAL

Entities, Investment Funds, General Warehouse Receipts Companies, Sofomes, and Insurance Institutions may guarantee the fulfillment of Derivative Operations through cash deposits, credit rights in their favor, or the titles or securities in their portfolio.

Regarding Forward Operations, Option Operations, Swap Operations, Credit Derivative Operations, as well as any others that, in their case, the Bank of Mexico authorizes under section 3.4 of these Rules, that Entities, Investment Funds, General Warehouse Receipts Companies, Sofomes, and Insurance Institutions carry out in over-the-counter markets, they may only grant the collateral mentioned in the preceding paragraph when the counterparties are Credit Institutions, Brokerage Houses, Foreign Financial Entities, Investment Funds, specialized investment companies for retirement funds, Sofomes, Insurance Institutions, as well as any other counterparty that the Bank of Mexico authorizes.

Entities and Investment Funds may in no case receive subordinate obligations as collateral for the fulfillment of the Derivative Operations they enter into. Likewise, Entities may not receive shares issued by financial entities or holding companies of financial groups as collateral.”

“6.2.5.5 Non-Centrally Cleared Over-the-Counter Derivative Operations Exempt from Initial Margin Exchange

Entities and Investment Funds will not be obligated to exchange Initial Margins regarding the following Non-Centrally Cleared Over-the-Counter Derivative Operations:
a) Option Operations in which the Entity or Investment Fund in question is the party making the payment of the respective premium to guarantee the execution of said Derivative Operation. In this case, the referred Entity or Investment Fund will not be obligated to provide Initial Margins for these operations, without prejudice to its obligation to receive from the counterparty the corresponding Initial Margins. b) Forward Operations on Currencies, provided that the settlement of such operations is in kind. c) In the case of Swap Operations on Currencies, whose contract establishes the exchange of notional amounts, the exemption applies only with respect to the settlement associated with said exchange and provided that the calculation of the Initial Margin Amount is carried out using an internal model. d) Non-Centrally Cleared Over-the-Counter Derivative Operations entered into with other Entities or Investment Funds of the same financial groups in Mexico to which they belong and with which they have entered into the Derivative Operations in question, or with Foreign Financial Entities belonging to the Financial Consortia to which the referred Entities and Investment Funds belong, provided that, such Entities and Investment Funds present to the Bank of Mexico and this approves that the Derivative Operations in question: i) are subject to adequate and centralized procedures for risk evaluation, measurement, and control; ii) are included in a consolidation scheme at the level of the financial group in Mexico, or the Financial Consortium, and iii) in their case, the Bank of Mexico has determined that the jurisdiction in which the Foreign Financial Entity belonging to the same Financial Consortium is located has an equivalent regulatory regime in matters of margin exchange for the celebration of Derivative Operations. e) Credit Default Derivatives in which the Entity or Investment Fund in question intervenes as a buyer. In this case, the referred Entity or Investment Fund will not be obligated to provide Initial Margins, without prejudice to its obligation to require from the counterparty the corresponding Initial Margins.

In addition to what is provided above in this section, when Entities and Investment Funds enter into Non-Centrally Cleared Over-the-Counter Derivative Operations with the same counterparty, that are of the same type of operation, type of Underlying, residual term, denomination and settlement currency, and whose economic effects result in a reduction of the net exposure associated with variations in market conditions, the Initial Margin requirement for said Derivative Operations may be calculated on the net notional amount with that counterparty with respect to the own Derivative Operations. The referred calculation may be given independently of the benefits associated with the recognition of the Master Netting Agreements indicated in section 6.2.7 of these Rules.”

“10.5 General Warehouse Receipts Companies and Sofomes shall not carry out Credit Derivative Operations.”

“10.6 In Credit Derivative Operations, the buyer and the seller may not assign their rights or obligations to third parties, unless the terms of the assignment are provided for in the contracts in which these operations are documented.”

“12.1 Entities, Investment Funds, General Warehouse Receipts Companies, Sofomes, and Insurance Institutions that enter into Derivative Operations, including those that are part of Structured Operations documented in the titles they issue or acquire, must provide information on said operations, in the terms, form, and deadlines established by the Bank of Mexico, through the Directorate of Information of the Financial System. When providing the aforementioned information, the referred financial institutions must indicate their LEI Code, as well as that of their counterparties that they have collected in compliance with section 4, second paragraph, of these Rules. Likewise, said financial institutions must inform of any modification made to their LEI Code, as well as that of their counterparties of which they are aware, no later than 10 Business Days after the effective date of the modification to their respective LEI Code or when they become aware of the modification to the LEI Code of the counterparty in question.

Furthermore, Entities must provide the information referred to in this section regarding the Derivative Operations carried out by financial entities with respect to which they are direct or indirect owners of titles representing their share capital with voting rights representing at least fifty-one percent of the paid-up capital or which they may exercise control over in terms of what is provided in article 2, fraction III, of the Securities Market Law.

Likewise, in accordance with the resolution issued by the Bank of Mexico and subject to what is established in the following section 12.3, the subjects referred to in the first paragraph of this section are obligated to provide the information indicated in said paragraph to any of the clearing houses indicated in section 7.5 of these Rules, which provide registration and custody services for Derivative Operations information, as well as to any of the foreign institutions recognized by the Bank of Mexico, in accordance with section 12.2, as central information registration entities.

In the resolutions issued by the Bank of Mexico for the purposes indicated in the preceding paragraph, it may determine those cases in which the subjects mentioned in the first paragraph of this section will not have to provide the Bank itself with the information to which said paragraph refers. In any case, the exception established by the Bank of Mexico will proceed without prejudice to its powers to require from Entities, Investment Funds, General Warehouse Receipts Companies, Sofomes, and Insurance Institutions any other information different from that which they provide to the clearing houses or foreign entities referred to, as well as any information on Derivative Operations for supervision purposes in particular cases.”

“12.2 The Bank of Mexico may grant recognition to foreign institutions that perform central information registration functions, taking into account the following:
a) That the foreign institutions are authorized by the financial authority of the country in which they act as central information registration and are subject to effective supervision and surveillance that guarantee compliance with the provisions applicable to them, either by the authorities of said jurisdiction or by the Bank of Mexico or the CNBV in cooperation with the respective authorities of said jurisdiction; b) That the regulatory framework applicable to said foreign institutions, on the one hand, produces results similar or equivalent to those of the provisions issued by Mexican authorities, applicable to whoever provides central information registration services for Derivative Operations in Mexico and that, on the other hand, complies with the Principles for Financial Market Infrastructures issued by the Committee on Payment and Settlement Systems of the Bank for International Settlements and the Council of the International Organization of Securities Commissions in 2012 or those that, in their case, replace them, including, without limitation, the principles related to i) the effective measurement, surveillance, and management of business, legal, and operational risk; ii) disclosure of accurate and timely market data to relevant authorities and the public according to their needs; iii) clear and transparent governance mechanisms; iv) access and participation criteria, and v) efficiency and transparency; c) That the Bank of Mexico, or in its absence, the CNBV, has entered into a memorandum of understanding with the foreign financial authorities that regulate and supervise said foreign institution, in accordance with applicable provisions, and d) That the Bank of Mexico can obtain from the foreign institution or, in its case, from the foreign financial authorities that regulate and supervise it, the information that Entities, Investment Funds, General Warehouse Receipts Companies, Sofomes, and Insurance Institutions provide to it regarding the Derivative Operations they carry out.

The Bank of Mexico may revoke the previously mentioned recognition, in those cases where, in its judgment, the criteria or requirements established at the time of granting said recognition cease to be met.”

“12.3 Entities, Investment Funds, General Warehouse Receipts Companies, Sofomes, and Insurance Institutions that have agreed with any of the clearing houses indicated in section 7.5 to provide them with the information on Derivative Operations indicated in the previous section 12.1, must have prior written authorization from their counterparties granted in such a way that it does not contravene the applicable confidentiality and secrecy provisions.”

“13. SANCTIONS

Entities, General Warehouse Receipts Companies, Sofomes, Insurance Institutions, and Investment Funds that fail to comply with the provisions contained in these Rules will be sanctioned by the Bank of Mexico in accordance with the Bank of Mexico Law and other applicable provisions.

Repealed.”

TRANSITIONAL PROVISIONS

FIRST.- This Circular will enter into force on the next business day following its publication in the Official Gazette of the Federation.

SECOND.- Authorizations for the celebration of Credit Derivative Operations that have been granted to Credit Institutions by the Bank of Mexico prior to the publication of this Circular will remain in effect under their terms.

THIRD.- Investment Funds must carry out the necessary actions to adjust their operations to what is established in this Circular, no later than February 12, 2024.

FOURTH.- Insurance Institutions must carry out the necessary actions to adjust their operations to what is established in this Circular, no later than September 1, 2024.

Mexico City, June 5, 2023.- BANK OF MEXICO: General Director of Central Banking Operations, Gerardo Israel García López.- Rubric.- General Director of Financial Stability, Fabrizio López Gallo Dey.- Rubric.- General Director of Financial System Affairs, José Luis Negrín Muñoz.- Rubric.- Director of Central Banking Provisions, María Teresa Muñoz Arámburu.- Rubric.- Director of Policy and Studies on Payment Systems and Market Infrastructures, Othón Martino Moreno González.- Rubric.

For any inquiries regarding the content of this Circular, the Bank of Mexico is at your disposal through the Directorate of Central Banking Authorizations and Sanctions at phone (55) 5237-2000 extension 3200.