General Provisions Applicable to Price Providers

GENERAL PROVISIONS APPLICABLE TO PRICE PROVIDERS Published in the Official Gazette of the Federation on August 21, 2020.

The National Banking and Securities Commission, with the agreement of its Board of Directors, based on articles 6, fourth paragraph; 324, fraction VII and 333, second and last paragraphs of the Securities Market Law, as well as 4, fractions VII, XXXVI and XXXVIII; 16, fraction I and 19 of the National Banking and Securities Commission Law, and

CONSIDERING

That in accordance with article 78 of the General Law for Regulatory Improvement and with the aim of reducing the compliance cost of these provisions, the National Banking and Securities Commission, through resolutions published in the Official Gazette of the Federation on November 4, 2019, amended general provisions applicable to various financial entities with the objective of extending, until January 1, 2021, the deadline for them to apply the Financial Information Standards issued by the Mexican Council for Financial Reporting Standards, A.C.;

That the "Provisions applicable to price providers" currently in force were issued by the National Banking and Securities Commission under the previous Securities Market Law, therefore it is necessary to issue regulations that incorporate those elements of the current regulation that are indispensable to establish the regulatory framework for providers, adding the requirements and rules that will ensure their better performance in accordance with the international standard and the Securities Market Law, in force since June 28, 2006;

That, resulting from the 2008 international financial crisis, the Group of Twenty (G-20) issued within its recommendations, the one related to the improvement of accounting regulation, requesting that changes be examined to curb the adverse dynamics associated with "Mark-to-Market Valuation" and, on the other hand, accelerate efforts to reduce the diversity of accounting rules to transition towards a single set of accounting standards;

That, to strengthen the requirements that entities requesting authorization to act as a price provider must meet, it specifies the documentation and information that must be presented for this purpose;

That, to ensure a more transparent provision of services by price providers, it specifies the information they must use and the mechanisms available to adjust updated prices for valuation, with the purpose that the determination, calculation, and provision or supply of updated prices for the valuation of securities, financial derivatives, and indices, comply with a standardized technique;

That it is fundamental to strengthen the regulatory framework that price providers must observe in estimating the prices of securities, financial instruments, and indices under disordered conditions, high volatility, or illiquidity in the markets;

That, in accordance with the principles of equity and transparency, it is necessary to foresee the minimum requirements in the contracting of the price provision service, as well as to establish the conditions that ensure the independence of price providers in the provision of their services;

That it is indispensable to indicate the terms under which price providers must submit to the National Banking and Securities Commission the information generated regarding the determination of the updated price for valuation, as well as that related to their users, and

That it is opportune to issue a single legal instrument containing the provisions applicable to price providers, systematizing their integration and homogenizing the terminology used, in order to thereby provide legal certainty regarding the regulatory framework to which the aforementioned price providers must adhere in the development of their activities, which will also facilitate consultation, compliance, and observance of the provisions applicable to them, therefore it has resolved to issue the following:

GENERAL PROVISIONS APPLICABLE TO PRICE PROVIDERS
Chapter One
Preliminary Provisions
Chapter Two
On the requirements to organize and operate as a Price Provider
Chapter Three
On the provision of services by Price Providers
Chapter Four
On the delivery of information
Chapter Five
Final Provisions
Annex 1 Disclosures related to the determination of the Updated Price for Valuation.

Chapter One
Preliminary Provisions
Article 1.- For the purposes of these provisions, the following terms shall be understood, in singular or plural, as:

I. Commission, the National Banking and Securities Commission.
II. Input Data, the information that the Price Provider uses to set the price of Securities, financial derivatives, and indices.
III. Updated Price for Valuation, the market or theoretical price referred to in the second paragraph of article 322 of the Securities Market Law.
IV. Price Provider, the corporations referred to in article 322 of the Securities Market Law.
V. Valuation Methodologies, those that aim to estimate the price of Securities, financial derivatives, and indices, on the valuation date, considering the current market conditions.
VI. User, financial entities and other persons who use the services of Price Providers.
VII. Securities, those considered as such by the Securities Market Law.

Chapter Two
On the requirements to organize and operate as a Price Provider
Article 2.- In addition to the documentation and information required by article 324 of the Securities Market Law to organize and operate as a Price Provider, when submitting the corresponding authorization request, the following must be included:

I. Amount of participation in the share capital of possible shareholders, declaring the source of their investment resources.
II. Name of the sole administrator or, if applicable, the members of the board of directors, as well as the directors and technical personnel responsible for the calculation and supply of Updated Prices for Valuation.
III. General operating plan that includes, at a minimum, the bases regarding its organization and internal control.
IV. Internal manuals referred to in article 324 of the Securities Market Law that contain, at a minimum, the following:
a) The description indicated in fraction IV, subsection a) of said legal provision, considering for valuation models, among other variables, credit quality, estimation of future cash flows, interest rates, discount rates and equivalents, exchange rates, present value, liquidity, volatility, and relevant information for its valuation. b) Regarding information sources, it must be specified whether they are primary or alternative, and the mechanism must be established through which it will be ensured that such information is timely, reliable, and representative of the market.

Chapter Three
On the provision of services by Price Providers
Article 3.- The services provided by Price Providers must be recorded in the contract they enter into with their Users. Such contract, in addition to containing the stipulations corresponding to its nature, must foresee the following:

I. The procedure and delivery schedules for Updated Prices for Valuation, including their modifications.
II. The obligation of the Price Provider to provide its Users with all the Updated Prices for Valuation requested.
III. The liability of the Price Provider arising from the provision of its services.
IV. The fees to be paid for the services provided by the Price Provider.
V. The advance notice that the Price Provider must give its Users that it will cease to provide services as such.
VI. Conventional penalties and other liabilities for non-compliance.
VII. Causes for contract termination.

Article 4.- Price Providers may not have an economic dependence relationship with their Users on the date of celebration of the respective service provision contract, nor during its validity.
Economic dependence is considered to exist when the fees received from the same User and related persons represent one-third or more of the total income of the Price Provider in a fiscal year.

Article 5.- It will be considered contrary to the sound practices of financial markets if shareholders, members of the board of directors, general director, executives, and members of the valuation committee of Price Providers are partners, advisors, auditors, or executives of the issuer whose Securities are subject to valuation by said Price Provider.
Shareholders, members of the board of directors, general director, executives, and members of the valuation committee of Price Providers, each time they carry out transactions on their own account with Securities, financial derivatives, and indices, must provide, within ten business days following the celebration of the transaction in question, a report to the person or area referred to in fraction I of article 5 of the General Provisions applicable to transactions with securities carried out by advisors, executives, and employees of financial entities and other obligated persons, published in the Official Gazette of the Federation on November 4, 2014, or those that replace them. For the purposes of the foregoing, Price Providers must establish in the guidelines, policies, and control mechanisms referred to in said article 5, a simplified form that must include, at a minimum, the following:

I. Name, position, and other data that allow full identification of the shareholder, member of the board of directors, general director, executive, and member of the valuation committee of the Price Provider who carries out the transaction.
II. Price of the transaction, issuer, volume, type, series, or class of Securities, financial derivatives, and indices subject to said transaction, as well as the date of its celebration and the corporate name of the securities market intermediary through which the aforementioned transactions were carried out.

Article 6.- Price Providers, in the Valuation Methodologies used, must use the following data to determine the Updated Price for Valuation:

I. Level 1 Input Data.- These are quoted prices, closing prices of stock exchanges, bids or offers in active markets, for identical Securities, financial derivatives, and indices to those being valued on the valuation date, which will represent reliable evidence for the determination of the Updated Price for Valuation and must be used without having to adjust them.
II. Level 2 Input Data.- This is information other than that indicated in the previous fraction I and which is available regarding Securities, financial derivatives, and indices, directly or indirectly, which includes the following elements:
a) Quoted prices for Securities, financial derivatives, and indices similar to those being valued, available in an active market, on the valuation date. b) Quoted prices for identical or similar Securities, financial derivatives, and indices to those being valued on the valuation date, which do not present transactions, or where these are of insufficient volume.
III. Level 3 Input Data.- These are those not available in the market and are not observable. They will be used when the conditions indicated in article 9 of these provisions are met.

Article 7.- Price Providers must classify the Updated Price for Valuation obtained through their methodology and valuation models into one of the following levels of the Updated Price for Valuation hierarchy:

I. Level 1.- Highest level, corresponding to prices obtained exclusively with Level 1 Input Data.
II. Level 2.- Prices obtained with Level 2 Input Data.
III. Level 3.- Lowest level, for those prices obtained with Level 3 Input Data.
In cases where the Updated Price for Valuation has been determined using Input Data of different levels, said price must be classified, in its entirety, at the same level of the Updated Price for Valuation hierarchy of the Input Data of the lowest level used.

Article 8.- For the determination of the Updated Price for Valuation, in addition to what is indicated in the previous articles, Price Providers must consider, at a minimum, the following elements:

I. The qualitative characteristics of the Security, financial instrument, and derivative index in question.
II. Take into account all available information.
Valuation Methodologies must be used consistently, as well as reviewed and calibrated periodically, in order to ensure that they reflect the current conditions of Securities, financial derivatives, and indices, as well as to identify any potential deficiencies in said methodologies. Price Providers must document the policies and procedures used to comply with this article.

Article 9.- Price Providers, in accordance with their policies, are responsible for determining that any of the circumstances indicated in the following fractions are updated and that, therefore, the conditions of the markets, of the Security, financial instrument, or index, do not allow an adequate estimation of its price:

I. That there are disordered or high volatility conditions in financial markets.
II. That there are liquidity problems, such as a significant decrease in volume or level of activity in relation to the normal activity of the market in question.
III. That the Security, financial instrument, or index in question presents problems, such as defaults, delisting, or that there is no information.
In the event that any of the circumstances indicated in the previous fractions are updated, the Price Provider, at the latest, within the next business day after such determination, must report it to the Commission through an email sent to the address provprecios@cnbv.gob.mx, detailing the information and documentation supporting its determination. The Commission will have a period of five business days to object to or make observations on the Price Provider's determination, being able to request the opinion of the Bank of Mexico and the National Retirement Savings System Commission. In the event that the Commission does not make any statements regarding this, it will be understood that it confirms the Price Provider's determination. In the event that it is confirmed that the circumstances indicated in the first paragraph of this article are updated, the Price Provider must apply the Valuation Methodology approved for such purposes, and, if applicable, the observations made by the Commission. Price Providers must inform Users of the update of the circumstances indicated in fractions I to III of this article, and inform them when such circumstances disappear.

Chapter Four
On the delivery of information
Article 10.- Price Providers must make available to Users, in terms of Annex 1 of these provisions, at the moment they so request, the necessary information for them to comply with the disclosure requirements regarding the determination of the Updated Price for Valuation that are requested from the Users themselves by the Commission.

Article 11.- Price Providers, through the valuation committee referred to in article 327 of the Securities Market Law, must resolve controversies and observations submitted in writing by their Users, as well as attend to observations made by the Commission, the Bank of Mexico, and the National Retirement Savings System Commission, in terms of said legal provision, regarding the Valuation Methodologies used or the Updated Valuation Prices published.
The resolutions and attendance to the observations indicated in the previous paragraph must be carried out on the same day of the presentation of the written statement, when, in the opinion of the Users themselves, the Commission, and the aforementioned authorities, there are elements that suggest an incorrect application of the Valuation Methodologies used for the calculation and determination of said prices, or that they do not adequately represent the conditions of the Security, financial derivative, or index. Price Providers must inform the Commission of the controversies and observations submitted by their Users, through an email sent to the address provprecios@cnbv.gob.mx, within the same time limit indicated in this paragraph. When, resulting from the resolution of the controversies and observations indicated in the first paragraph of this article, any Updated Price for Valuation is modified, Price Providers will communicate it to their other Users, to the Commission, and, if applicable, to the corresponding authority in terms of the previous paragraph, on the same date they resolve its validity. The modification referred to in this paragraph may only be made on the day that valuation prices are published.

Article 12.- Price Providers will provide the Commission and the National Retirement Savings System Commission, through electronic means and on the same day of their calculation, the Updated Prices for Valuation and, if applicable, the modifications they have delivered to Users subject to the supervision of each of them.

Article 13.- Price Providers will deliver semi-annually to the Commission, the list of their Users, within the first ten business days of the months of January and July of each year, through an email sent to the address provprecios@cnbv.gob.mx.

Chapter Five
Final Provisions
Article 14.- The Commission may order the suspension of the advertising carried out by Price Providers, when, in its opinion, it implies inaccuracy or obscurity, or by any circumstance that may induce error regarding the services they provide.

TRANSITORY PROVISIONS
FIRST.- These provisions will enter into force on January 1, 2022.
SECOND.- Upon the entry into force of these provisions, the "Provisions applicable to price providers", published in the Official Gazette of the Federation on September 13, 1999, will be repealed.