Circular 7/2014 — Modifies Circular 5/2011

Thursday, May 15, 2014 OFFICIAL GAZETTE (First Section) BANCO DE MÉXICO CIRCULAR 7/2014 addressed to Credit Institutions and Brokerage Houses, regarding modifications to the procedure to act as market makers for government securities. At the margin a logo, which says: Bank of Mexico. CIRCULAR 7/2014 TO CREDIT INSTITUTIONS AND BROKERAGE HOUSES: SUBJECT: MODIFICATIONS TO THE PROCEDURE to act as market makers for government securities The Bank of Mexico, in its capacity as financial agent of the Federal Government, in order to comply with the instruction of the Ministry of Finance and Public Credit to make known to these entities modifications to the procedure to act as market makers for government securities, with the aim of continuing to promote the development of the market for Federal Government Fixed Rate Development Bonds (BONOS) and denominated in Investment Units (UDIBONOS), attaches hereto a copy of Office No. 305.-035/2014, issued by said Ministry, which will enter into force on the next banking day following its publication in the Official Gazette of the Federation. The foregoing, based on what is provided in articles 28, paragraphs sixth and seventh of the Political Constitution of the United Mexican States; 3, fraction III; 7, fraction I and 10 of the Bank of Mexico Law; 22 of the Law for Transparency and Ordering of Financial Services, as well as 4, first paragraph, 8, paragraphs fourth and seventh, 10, first paragraph, 14 Bis, first paragraph, in relation to 17, fraction I, and 12, first paragraph, in relation to 19 Bis, fraction V, of the Internal Regulations of the Bank of Mexico, which grant it the authority to issue provisions through the Directorate of Central Banking Regulations and the General Directorate of Central Banking Operations, respectively, as well as Second fractions VI and X of the Agreement on the Assignment of Administrative Units of the Bank of Mexico.

(First Section) OFFICIAL GAZETTE Thursday, May 15, 2014 Mexico, D.F., May 14, 2014.- BANK OF MEXICO: Jaime José Cortina Morfín, General Director of Central Banking Operations.- Signature.- Eduardo Aurelio Gómez Alcázar, Director of Central Banking Regulations.- Signature.

“ At the margin a seal with the National Coat of Arms, which says: United Mexican States.- Ministry of Finance and Public Credit.- Undersecretariat of Finance and Public Credit.- Public Credit Unit.- Office No. 305.- 035/2014 Mexico, D.F. May 14, 2014 LIC. JAIME JOSÉ CORTINA MORFÍN GENERAL DIRECTOR OF CENTRAL BANKING OPERATIONS BANK OF MEXICO PRESENT. The Ministry of Finance and Public Credit, through the Public Credit Unit, based on articles 4th, fractions I and V of the General Public Debt Law; 3rd, fraction III, 7th, fraction I, 8th and 10 of the Bank of Mexico Law; 17 fractions VIII, X and XXI of the Internal Regulations of the Ministry of Finance and Public Credit; Sole fractions V and VII of the Decree authorizing the Federal Executive to issue Treasury Certificates, published in the Official Gazette of the Federation (DOF) on July 8, 1993; 1st, fraction VI, 2nd and 3rd of the Decree authorizing the Ministry of Finance and Public Credit to issue Federal Government Development Bonds, published in the DOF on September 22, 1987, modified by Decree published in the DOF on September 9, 1998; the Decree establishing the obligations that may be denominated in Investment Units and reforming and adding various provisions of the Fiscal Code of the Federation and the Income Tax Law, published in the DOF on April 1, 1995 modified by Decree published in the DOF on December 7, 2009 and article 20 Ter of the Fiscal Code of the Federation, considers it convenient to continue promoting the development of the market for Federal Government Fixed Rate Development Bonds (BONOS) and denominated in Investment Units (UDIBONOS). For the above, it has decided to modify Office 305.-027/2011 dated January 27, 2011, modified by Office 305.-105/2011 dated July 26, 2011, by Office 305.-178/2011 dated November 18, 2011, by Office 305.-023/2012 dated February 9, 2012, by Office 305.-085/2012 dated July 3, 2012 and by Office 305.-010/2014 dated February 7, 2014, in its sections 1 and 2.2, as well as in its Annex_1, to remain in the following terms:

"1. DEFINITIONS I.- to V.- … VI.- Brokerage Houses (Brokers): to the societies that administer systems to facilitate operations with securities between Financial Intermediaries, regulated by the provisions issued by the National Banking and Securities Commission, as well as those that modify or replace them. VII.- to XIV.- … XV.- Turnover Index: the ratio between the volume traded in the secondary market during a day of BONOS published by the Bank of Mexico through its Internet website identified with the domain name: www.banxico.org.mx, and the Balance Placed by Primary Operations of said BOND on the same date. XVI.- Financial Intermediaries: jointly or separately, credit institutions and brokerage houses. XVII.- MexDer or Mexican Derivatives Market: the anonymous society named MexDer, Mexican Derivatives Market, S.A. de C.V., authorized by the Ministry with the object of providing the facilities and other services so that derivative contracts may be quoted and negotiated, in terms of the “Rules to Which Participants of the Listed Derivatives Contract Market Must Be Subject”, issued jointly by the Bank of Mexico, the National Banking and Securities Commission and the Ministry. XVIII.- Operation in MexDer: the purchase or sale operations of futures contracts with a government value as underlying, carried out in MexDer.

Thursday, May 15, 2014 OFFICIAL GAZETTE (First Section) XIX.- Primary Market Operations: the placement of CETES, BONOS and UDIBONOS that is carried out in accordance with the “Rules of the Auctions for the Placement of Government Securities and IPAB Securities” or those that replace them, issued by the Bank of Mexico. XX.- Clientele Operations: the direct operations with CETES, BONOS and UDIBONOS that Financial Intermediaries carry out with the investing public. XXI.- Intermediary Operations: the direct operations with CETES, BONOS and UDIBONOS that Financial Intermediaries carry out among themselves. XXII.- Net Long Position: the result of adding to the own position the titles granted as guarantee to the Bank of Mexico by the securities lending operations carried out by Market Makers, as well as the titles to be received by direct purchases, repo or securities lending, minus the titles to be delivered by direct sales, repo or securities lending defined for each particular issuance of BONOS and UDIBONOS. XXIII.- Proportional Net Long Position: the Percentage of the Balance Placed by Primary Operations that the Net Long Position of a Market Maker represents of any issuance of BONOS or UDIBONOS. XXIV.- Positions in MexDer or Positions: the buy and sell quotes of futures contracts of BONOS and CETES, in accordance with the criteria established in Annex 1 of this Office. XXV.- Points in MexDer: The scoring that will be granted to Market Makers and Applicants based on the evaluation of their Positions according to the criteria established in Annex 1 of this Office. XXVI.- Balance Placed by Primary Operations: the nominal amount of the total titles that have been placed through Auctions, swaps, or any operation other than securities lending to Market Makers, minus those that have been withdrawn from circulation by any transaction resulting in their early maturity such as repurchase and swap. XXVII.- Ministry: the Ministry of Finance and Public Credit. XXVIII.- Trading Systems with Clientele: the mechanisms aimed at facilitating operations with securities of Financial Intermediaries with the investing public. XXIX.- Auctions: the auctions for the placement of CETES, BONOS and UDIBONOS, as applicable, that are carried out in accordance with the “Rules of the Auctions for the Placement of Government Securities and IPAB Securities”, or those that replace them, issued by the Bank of Mexico. XXX.- UCP: the Public Credit Unit of the Ministry. XXXI.- UDIBONOS: Federal Government Development Bonds denominated in Investment Units.”

2. FINANCIAL INTERMEDIARIES THAT MAY ACT AS MARKET MAKERS. . . . "2.2 The Bank of Mexico, in its capacity as financial agent of the Federal Government, will calculate the AI of Market Makers and Applicants, in accordance with what is provided in Annex 1 of this Office, as well as the incentives or penalties for diversification and for Positions and Operation in MexDer referred to in said Annex. For such purposes, Applicants and Market Makers must send to the Bank of Mexico, in the terms determined by said Central Bank, the necessary information to calculate their respective AIs, as well as the incentives and penalties for diversification and for Operations in MexDer. For the calculation of incentives for Positions in MexDer, the Bank of Mexico will use the information corresponding to the Points in MexDer sent by the latter in terms of said Annex. Subsequently, the Bank of Mexico will send the results obtained to the Ministry, in the terms that may be agreed upon, and it will be the responsibility of said Ministry to calculate the MMIs in accordance with what is provided in section 4.3. Finally, the UCP will make known to Market Makers and Applicants the final results individually.”

“Annex 1 Calculation of the Market Maker Index The Market Maker Index (IFM) is the sum of the Activity Index (AI) plus incentives minus penalties for the Diversification Index (ID), plus incentives for Positions and Operation in MexDer (OM), plus other incentives and penalties that, according to section 4.3 of this Office, the Ministry determines.

(First Section) OFFICIAL GAZETTE Thursday, May 15, 2014 The IFM will be the result of the following formula: IFM = AI + incentives – penalties Below is described the calculation methodology of the IFM: I. Activity Index (AI) Corresponds to the market participation in the nominal volume weighted by duration traded directly in CETES and BONOS. The [formula missing in source text representation] for the intermediary is defined by: [Symbol]: Market participation of the intermediary in the volume traded directly in CETES and BONOS, in the considered segments, for the period defined in section 2.4 of this Office. To consider the risk of operating issuances of different maturity, the nominal volume is multiplied by the duration 1 of the instrument. The Bank of Mexico may exclude from the calculation the operations referred to in section 2.3 of this Office. The [Symbol] for the intermediary is obtained as follows: Where: [Symbol]: Market participation of the intermediary in the total volume traded of CETES. [Symbol]: Market participation of the intermediary in the total volume traded of BONOS. [Symbol]: Market participation of the intermediary in the total volume traded in the primary market (Primary). [Symbol]: Market participation of the intermediary in the total volume traded with clients other than banks or brokerage houses through any means (Clients). [Symbol]: Market participation of the intermediary in the total volume traded with banks or brokerage houses through Brokerage Houses (Brokers). Where: [Symbol]: Market participation of the intermediary in the volume traded in the segment that may be Primary, Clients or Brokers: [Symbol]: Nominal amount traded by the intermediary in the segment [Symbol]. For the case of the Primary segment, it represents the nominal amount assigned in the primary auction. [Symbol]: Total nominal amount traded by all intermediaries in the segment [Symbol]. For the case of the Primary segment, it represents the nominal amount assigned in the primary auction. [Symbol]: Duration, expressed in years 2 of the issued Cete or Bond operated calculated for the day of settlement of each operation. II. Diversification Index (ID). Indicates the average number of BONOS issuances in which each intermediary diversifies its operation.

1 Macaulay duration will be used. 2 Idem

Thursday, May 15, 2014 OFFICIAL GAZETTE (First Section) Diversification index for the intermediary of the direct operation of BONOS through Brokerage Houses (Brokers) and the operation with clients other than banks or brokerage houses through any means during the measurement period defined in section 2.4 of this Office. When an intermediary does not operate BONOS issuances, its diversification index takes the value of zero. The Bank of Mexico may exclude from the calculation the operations referred to in section 2.3 of this Office. For the calculation of the ID, all BONOS issuances will be considered except for the two issuances that present the highest average Turnover Index in the measurement period defined in section 2.4 of this Office. These issuances will be made known by the Ministry 3 business days before the end of the calendar month through its internet portal or any other means of communication it deems appropriate. The ID is calculated as: Where: [Symbol]: Proportion of the nominal amount traded by the intermediary in the issuance with respect to the Balance Placed by Primary Operations. [Symbol]: Nominal amount traded by the intermediary in the issuance [Symbol]. [Symbol]: Balance Placed by Primary Operations of the issuance [Symbol], which was observed on average during the measurement period. The average of the Balance Placed by Primary Operations is calculated based on Business Days in which the issuance was active. [Symbol]: Sum of the [Symbols] for all issuances and for each intermediary [Symbol]. Once the average number of issuances operated by each Market Maker during the measurement period, [Symbol], is obtained, it is divided by the average number of active issuances during the measurement period to obtain the percentage it represents with respect to the total. The incentives or penalties corresponding to diversification are obtained according to the following matrix and will be applied to each Market Maker, who has been acting as such for more than six consecutive months: Range of % of active issuances Incentive / Penalty From To (Basis points) 70% 100% 150 60% 70% 100 50% 60% 50 40% 50% 0 0% 40% -30 III. Incentives for Positions in MexDer They will correspond to the allocation of points that MexDer, in accordance with the evaluation it carries out for this purpose, makes regarding the Positions of each Market Maker and Applicant according to the following methodology: • MexDer will take daily 40 samples of the Positions presented during the negotiation period of the day in question. For such purposes, only those Positions with a minimum volume of 100 contracts for BONOS futures and 1,000 for the case of CETES futures will be considered. • For each sample, points will be assigned in accordance with the following criteria:

(First Section) OFFICIAL GAZETTE Thursday, May 15, 2014 a) If the difference between the best buy Position and the best sell Position of Market Makers or Applicants is equal to the difference in MexDer, 10 Points in MexDer will be assigned. b) If the difference between the best buy Position and the best sell Position of Market Makers or Applicants is less than the difference in MexDer, 15 Points in MexDer will be assigned. c) If the difference between the best buy Position and the best sell Position of Market Makers or Applicants is greater than the difference in MexDer, 3 Points in MexDer will be assigned. d) If Market Makers or Applicants have exclusively buy or sell Positions, 3 Points in MexDer will be assigned. e) To those Market Makers or Applicants whose best buy and sell Positions meet the difference in MexDer and have the smallest difference in the sample, an additional 10 Points in MexDer will be assigned. For the purposes of the above subsections, the difference in MexDer will correspond to that for the different classes of futures determined by MexDer and published on its Internet website identified with the domain name: www.mexder.com.mx. The cited difference will correspond to that required in stable market, unless the Bank of Mexico determines that it will correspond to the difference required in volatile market, for which it may request the opinion of MexDer. Market Makers and Applicants who obtain, in accordance with the information that MexDer provides to the Bank of Mexico, a minimum daily average of 500 Points in MexDer during the measurement period defined in section 2.4 of this Office, will be entitled to 40 basis points. On the other hand, Market Makers who throughout the cited measurement period have obtained the highest scores will receive additional points in accordance with the following table: Rank in Measurement Incentive (bp) First place 30bp Second place 20bp Third place 10bp In case of a tie, priority will be given to Market Makers with greater volume of Operation in MexDer in said measurement period. MexDer will report to the Bank of Mexico within two business days following the 15th day of the measurement period the number of Points in MexDer obtained by each of the Market Makers and Applicants. IV. Incentives for Operations in MexDer The volume of Operation in MexDer ([Symbol]) will be calculated based on the number of contracts operated and for the intermediary it is defined by: [Symbol]: Number of futures contracts with a government value as underlying, bought and sold in MexDer, arranged through any means, by the intermediary [Symbol], including operations arranged in the measurement period defined in section 2.4 of this Office. In case that any of the mentioned days is a non-business day for Financial Intermediaries, the immediate next Business Day will be taken into account for the start day and the immediate previous Business Day for the end day of the period. The Bank of Mexico may exclude from the calculation the operations referred to in section 2.3 of this Office. The [Symbol] for the intermediary is calculated as: Where: [Symbol]: Total number of futures contracts with BONOS as underlying operated by intermediary j. [Symbol]: Total number of futures contracts with CETES as underlying operated by intermediary j.

Thursday, May 15, 2014 OFFICIAL GAZETTE (First Section) Market Makers and Applicants who meet the requirement of a minimum daily average of 500 Points in MexDer and have a [Symbol] greater than or equal to 40,000 contracts during the cited measurement period, will receive an additional 30 basis points.” TRANSITORY PROVISIONS FIRST.- The provisions of this Office will enter into force on May 16, 2014. SECOND.- The contracts currently in effect signed between the Bank of Mexico and Market Makers will retain their validity, so no new contracts need to be signed due to the provisions of this Office. Finally, we instruct the Bank of Mexico to, in its capacity as financial agent of the Federal Government, make known to Financial Intermediaries the provisions of this Office. Without further particulars, I renew to you the assurances of my most distinguished consideration. Effective Suffrage. No Re-election. The Head, Alejandro Díaz de León Carrillo.- Signature.