2010-02-23 | Circular 8/2010

Added

Circular 8/2010 — Auctions for the Sale of US Dollar Put Options

The Banco de México establishes rules for credit institutions to sell US dollars via put options through monthly auctions, requiring bids in increments of one million dollars and specifying auction types, assignment procedures, and exercise conditions. Institutions must pay a premium to acquire the right to sell dollars at the exercise rate if it is equal to or lower than the maximum sale rate, with settlement occurring two business days after exercise. The document mandates specific notification procedures, authorizes automatic debits for premiums and penalties for non-delivery, and exempts these transactions from certain foreign exchange risk position calculations.

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CIRCULAR 8/2010

Mexico, D.F., February 23, 2010.

TO CREDIT INSTITUTIONS:

SUBJECT: AUCTIONS FOR THE SALE OF US DOLLARS PUT OPTIONS.

The Bank of Mexico, based on Articles 28 of the Political Constitution of the United Mexican States, sixth and seventh paragraphs; 7, fraction X, 8, first paragraph, 14, first paragraph, and 24 of the Bank of Mexico Law; 22 of the Law for the Transparency and Ordering of Financial Services; as well as 8, third and sixth paragraphs, 10, 17, fraction I, and 19, fraction IX of the Internal Regulations of the Bank of Mexico, which provide for the attribution of this Central Institute, through the Directorate of Central Bank Dispositions and the Directorate of Operations, to issue provisions, Sole of the Agreement on the Affiliation of the Administrative Units of the Bank of Mexico, fractions I and IV, in compliance with the agreement of the Exchange Commission made known through a press release of February 22, 2010, through which it determined the convenience that, without altering the current exchange regime, the Bank of Mexico increase the level of its international reserves, has resolved to carry out auctions through which institutions may sell US dollars to this Central Institute, in accordance with the following:

RULES FOR THE AUCTIONS OF US DOLLAR PUT OPTIONS

1. DEFINITIONS

For brevity, in singular or plural, for the purposes of these Rules, the following shall be understood:

Single Account: the deposit account in national currency that the Bank of Mexico maintains for multiple banking institutions and development banking institutions as provided in Circulars 2019/95 and 1/2006, respectively;

Business Day: the days of the week, except Saturdays, Sundays, and those on which credit institutions are obliged to close their offices and branches, in terms of the general provisions issued for such effect by the National Banking and Securities Commission;

Dollar: the legal tender of the United States of America (USA);

Exercise Date: any Business Day on which the right derived from a Put Option is exercised during the Validity Period;

Settlement Date: the second Business Day following the Exercise Date;

Reference Amount: the amount of Dollars to be auctioned in the relevant auction, which the institutions receiving allocation may, collectively, sell to the Bank of Mexico and which will be made known in the corresponding call;

Put Option: the contract by virtue of which, through the payment of a Premium, an institution acquires the right to sell Dollars to the Bank of Mexico against national currency, during the Validity Period, at the Exercise Exchange Rate;

Validity Period: the period between the first Business Day of the month immediately following the date of an auction and the last Business Day of that same month, during which the rights derived from the Put Option assigned in said auction may be exercised;

Premium: the amount in national currency that institutions are willing to pay to the Bank of Mexico to celebrate a Put Option;

Exercise Exchange Rate: the exchange rate to settle obligations denominated in foreign currency payable in the Mexican Republic that the Bank of Mexico publishes in the Official Gazette of the Federation, on the Business Day on which the right derived from a Put Option is exercised, and

Maximum Sale Exchange Rate: the arithmetic average of the exchange rates that the Bank of Mexico has determined, in accordance with the Provisions applicable to the determination of the exchange rate to settle obligations denominated in foreign currency payable in the Mexican Republic, for the 20 Business Days immediately preceding the date on which it is intended to exercise the right derived from a Put Option.

2. CALL

The Bank of Mexico will make the calls known on the date that each auction of Put Options of Dollars is carried out, through the Bank of Mexico Exchange Auction System (SUBCAM-BANXICO).

The auctions of Put Options of Dollars will be carried out on the last Business Day of each month, except in the month of December, in which they will be held on the penultimate Business Day of the month. This is without prejudice to cases in which the Bank of Mexico makes known another particular date.

The calls will contain, among other characteristics of the auctions, the Reference Amount, the type of auction to be carried out, the deadline for the celebration of the auction, and the schedules for the presentation of bids.

3. TYPES OF AUCTIONS

The auctions may be:

a) Traditional: those in which institutions present their bids without having information about the other bids presented. Institutions receive information about other participants until the results of the auction are made public, or

b) Interactive: those in which institutions present their bids and have the possibility of knowing the marginal assignment price of the auction.

Both types of auctions will be carried out based on a multiple price assignment, that is, the offered amount of Dollars will be assigned starting from the best bid for the Bank of Mexico, and the bids that result in assignment will be attended to at the requested price.

4. BIDS

Bids must be presented in increments of one million Dollars or their multiples. When presenting bids, institutions must indicate the amount of the Premium expressed for each thousand Dollars. The Premium must always be positive.

Each bidder may present one or more bids per auction, provided that the amount of each bid does not exceed the Reference Amount. Received bids that exceed said amount will not be considered in the relevant auction. Bids must be presented through the SUBCAM-BANXICO or through any other authorized electronic, computing, or telecommunications medium for this effect by the Bank of Mexico, on the date and schedules established in the respective call.

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

5. EFFECTS OF BIDS

Bids presented to the Bank of Mexico will produce the broadest effects in law and imply the bidder's acceptance to be subject to all and each of these Rules, as well as to the terms and conditions established in the call in which the Bank of Mexico communicates the particular characteristics of the auctions of Put Options of Dollars.

Every bid will be binding and irrevocable for the bidder who presents it.

By the mere fact of presenting bids, institutions irrevocably authorize the Bank of Mexico to, in the event that such bids receive assignment, charge their Single Account on the Business Day immediately following the date of the corresponding assignment, up to the amount corresponding to the respective Premium.

The Bank of Mexico reserves the right to invalidate bids that do not comply with the provisions of these Rules, are incomplete, or are incorrect in any way.

The Bank of Mexico reserves the right to reject any bid or to declare the auction totally or partially void, if in its judgment such bids, due to their characteristics, could produce inconvenient effects in the exchange market, in the healthy development of the financial market in general, or if it considers that they are not consistent with the conditions prevailing in the market; or if it detects collusion among participating institutions.

Likewise, when any institution has requested the exercise of a Put Option of Dollars and does not deliver on the Settlement Date the total amount of Dollars corresponding to it or when in any other way it fails to comply with the provisions of these Rules, the Bank of Mexico may suspend, for the time it determines, the receipt of bids from such institution in the auctions carried out by the Bank of Mexico on its own account, or the celebration of exchange operations or financial derivative operations.

6. ASSIGNMENT

Assignment will be made in descending order of the Premiums corresponding to the bids in question, without exceeding the Reference Amount. In the event that the value of the total bids exceeds said Reference Amount, only bids with an accumulated value equal to it will be accepted.

If there are several tied bids at the point where the Reference Amount is reached, causing said amount to be exceeded, the assignment will be made pro rata of the amount requested in the tied bids when it concerns traditional auctions and according to the order in which the bids were received when the relevant auction is interactive.

Likewise, in the event that during the period between the presentation of bids and the moment when the results of the auctions are made known, system failures occur, the auction will be declared void and the Bank of Mexico will call for a new auction on the same Business Day through the same medium or another that it makes known to institutions.

In the event that in an auction the entire Reference Amount has not been assigned, the Bank of Mexico will call for a new auction that same day for the remaining amount. The schedules and type of auction will be made known by the Bank of Mexico in the respective call.

7. RESULTS OF THE AUCTIONS

The results of the auctions will be available through the SUBCAM-BANXICO within ten minutes after the expiration of the deadline for the presentation of bids in each auction.

8. EXERCISE OF PUT OPTIONS

The institution that has received assignment may sell Dollars to the Bank of Mexico on any Business Day during the Validity Period, up to exhausting the assigned amount, in quantities of one million Dollars or their multiples. Dollars may only be sold to the Bank of Mexico in exercise of the Put Option when the Exercise Exchange Rate is equal to or lower than the Maximum Sale Exchange Rate.

The Bank of Mexico, through the electronic, computing, or telecommunications media indicated for this effect, will communicate to institutions each Business Day the Maximum Sale Exchange Rate.

In order to exercise the right derived from a Put Option, institutions must contact the Sub-Manager of National Exchanges of the Bank of Mexico by telephone or through any other electronic, computing, or telecommunications medium expressly accepted by the Bank of Mexico, between 9:00:00 and 13:00:00 hours on the Exercise Date, indicating the amount of Dollars they wish to sell. This is understood to mean that institutions must confirm the operation to the Bank of Mexico no later than 14:30:00 hours of the same Business Day, through the sending of a SWIFT message or by delivering a communication according to the model attached to these Rules. The SWIFT message must include the information contained in the cited model.

Institutions that exercise the right derived from a Put Option must effect on the corresponding Settlement Date, the delivery of the Dollars subject to the operation by: i) crediting them to the account indicated for this effect by the Bank of Mexico, or ii) authorizing the Bank of Mexico itself to charge the Dollar account it maintains for them for the respective amount.

On its part, on the Settlement Date, which must correspond to a day on which banking operations are carried out in the USA; once institutions have made the delivery of the Dollars in accordance with one of the aforementioned options, the Bank of Mexico will credit the amount of the counter-value of said Dollars to the Single Account it maintains for them.

In the event that any institution does not credit the total of the respective Dollars to the mentioned account or does not have sufficient funds in the account it holds with the Bank of Mexico to make the delivery of the Dollars for the requested amount, the purchase and sale operation of Dollars will be celebrated for the amount effectively delivered.

In the case referred to in the previous paragraph, the institution must pay the Bank a conventional penalty for the equivalent in national currency of 0.1 per thousand of the amount of Dollars not delivered, for each Business Day that the non-compliance lasts.

To calculate the equivalent in national currency of the undelivered Dollars, the exchange rate published by the Bank of Mexico in the Official Gazette of the Federation on the date on which the calculation is made will be used.

Such conventional penalties will be charged in national currency to the Single Account that the Bank of Mexico maintains for the non-compliant institution, each Business Day that non-compliance occurs.

9. GENERAL PROVISIONS

In the event that due to force majeure or fortuitous event bids cannot be presented through the SUBCAM-BANXICO or the respective calls or the results of the auctions cannot be made known in accordance with these Rules, the Bank of Mexico will make known to institutions the applicable procedure for the carrying out of such auctions or for making known such calls or the corresponding results, as the case may be.

The Put Options referred to in these Rules will not count to determine the foreign exchange risk positions of multiple banking and development banking institutions, provided for in paragraphs M.61. of Circular 2019/95 and BD.4. of Circular 1/2006, respectively, nor for the Regimes of Admission of Liabilities and Investment contained in paragraph M.13. of the aforementioned Circular 2019/95. Without prejudice to the foregoing, the sales of foreign exchange that these institutions celebrate in connection with such contracts must comply with the provisions of the aforementioned dispositions.

The "Rules to which multiple banking institutions, brokerage houses, investment companies, and limited-purpose financial societies must adhere in the carrying out of derivative operations" contained in Circular 4/2006 of December 18, 2006, and paragraph BD.4. of Circular 1/2006 directed at development banking institutions, will not be applicable to the Put Option of Dollars operations provided for in these Rules.

ANNEX

MODEL OF CONFIRMATION OF THE EXERCISE OF A PUT OPTION OF DOLLARS IN ACCORDANCE WITH THE "RULES FOR THE AUCTIONS OF US DOLLAR PUT OPTIONS"

(Institution's letterhead)

Mexico, D.F., ___ of ______ of 20__.

Bank of Mexico.

International Operations Processing Management.

Avenida 5 de mayo No. 6, ground floor,

Col. Centro, C.P. 06059, Mexico, D.F.

(DENOMINATION OF THE INSTITUTION) confirms the sale of US dollars to that Central Bank resulting from the exercise of rights of the Put Option of Dollars assigned to it in the Put Option of Dollars auction of date __ of ___ of 20__, arranged today with (NAME OF THE EMPLOYEE OF THE SUB-MANAGEMENT OF NATIONAL EXCHANGES WITH WHOM THE EXERCISE OF RIGHTS OF THE PUT OPTION OF DOLLARS WAS ARRANGED) under the following terms:

Exercise Date:

Settlement Date:

Amount of US dollars to be sold to the Bank of Mexico:

Exercise Exchange Rate:

OPTION 1* [For the settlement of the referred operation, in accordance with what is established in paragraph 8. of the "RULES FOR THE AUCTIONS OF US DOLLAR PUT OPTIONS" made known through Circular 8/2010 of February 23, 2010,

(DENOMINATION OF THE INSTITUTION) will credit on the Settlement Date, the amount of US dollars previously indicated, in the account that the Bank of Mexico will make known to it.]

OPTION 2* [For the settlement of the referred operation, in accordance with what is established in paragraph 8. of the "RULES FOR THE AUCTIONS OF US DOLLAR PUT OPTIONS" contained in Circular 8/2010 of February 23, 2010, (DENOMINATION OF THE INSTITUTION) authorizes and instructs the Bank of Mexico to charge on the Settlement Date, the amount of US dollars previously indicated, in account number: _____________

denominated in said currency that we hold.]

Likewise, it irrevocably authorizes and instructs that Central Bank to carry out the charges, if any, in the Single Account in national currency that we hold, for the payment of the conventional penalties that my represented party must cover in terms of what is provided in the aforementioned Rules.

Sincerely,

(Name, signature, and position of the institution's official(s) with authority to exercise acts of administration)

Cc. Sub-Manager of National Exchanges of the Bank of Mexico.

  • OPTION 1 must be used when the delivery of the dollars is made by crediting the account indicated by the Bank of Mexico and OPTION 2 when the delivery of the dollars is made by charging the account in said currency that the Bank of Mexico holds for the institution.

NOTE: An original and a copy must be delivered to the International Operations Processing Management.

TRANSITORY PROVISIONS

FIRST. These Rules will enter into force on February 24, 2010.

SECOND. On the date of entry into force of these Rules, the CIRCULAR-TELEFAX 71/96 of August 1, 1996, is rendered ineffective.

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