General Provisions Applicable to Price Providers

DOF: 21/08/2020

GENERAL PROVISIONS APPLICABLE TO PRICE PROVIDERS

A seal with the National Coat of Arms appears at the margin, which reads: United Mexican States.- TREASURY.- Ministry of Finance and Public Credit.- National Banking and Securities Commission.

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

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 Reporting 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, so it is necessary to issue regulations that incorporate those elements of the current regulation that are essential to establish the regulatory framework for providers, adding requirements and rules that will ensure their better performance in accordance with international standards and the Securities Market Law, in effect since June 28, 2006;

That, as a result of 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 companies must meet to request authorization to act as a price provider, the documentation and information that must be presented for this purpose are specified;

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

That it is fundamental to reinforce 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 in which price providers must present 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 said price providers must adhere in the development of their activities, which will also facilitate consultation, compliance, and observance of the provisions applicable to them, 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:

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 derivative instruments, 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 anonymous companies referred to in article 322 of the Securities Market Law.

V. Valuation Methodologies, those whose objective is to estimate the price of Securities, financial derivative instruments, 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 presenting the corresponding authorization request, the following must be included:

I. Amount of participation in the share capital of possible shareholders, declaring the source of funds for their investment.

II. Name of the sole administrator or, if applicable, of the members of the board of directors, as well as of the directors and technical personnel responsible for the calculation and supply of Updated Prices for Valuation.

III. General operating plan that includes, at least, the bases related to 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 section a) of section IV 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 their 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. Said 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 they request.

III. The responsibility of the Price Provider derived from the provision of its services.

IV. The fees to be covered for the services provided by the Price Provider.

V. The advance notice with which the Price Provider must notify its Users that it will cease to provide services as such.

VI. The contractual penalties and other responsibilities for non-compliance.

VII. The causes for contract rescission.

Article 4.- Price Providers may not have an economic dependency relationship with their Users on the date of celebration of the respective service provision contract, nor during its validity.

Economic dependency is considered to exist when the fees received from the same User and persons related to it represent, in a fiscal year, one-third or more of the total income of the Price Provider.

Article 5.- It will be considered contrary to sound financial market practices if the shareholders, members of the board of directors, general director, executives, and members of the valuation committee of Price Providers are partners, board members, auditors, or executives of the issuer whose Securities are subject to valuation by said Price Provider.

The 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 derivative instruments, 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 section I of article 5 of the General Provisions applicable to transactions with securities carried out by board members, 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 least, 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 operation.

II. Price of the operation, issuer, volume, type, series, or class of Securities, financial derivative instruments, and indices subject to said operation, as well as the date of its celebration and the corporate name of the securities market intermediary through which the aforementioned operations were carried out.

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

I. Level 1 Input Data.- These are quoted prices, closing prices of exchanges, events, or bids in active markets, for Securities, financial derivative instruments, and indices identical 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 section I and that is available regarding Securities, financial derivative instruments, and indices, directly or indirectly, which includes the following elements:

a) Quoted prices for Securities, financial derivative instruments, and indices similar to those being valued, available in an active market, on the valuation date.

b) Quoted prices for Securities, financial derivative instruments, and indices identical or similar to those being valued on the valuation date, that do not present transactions, or that these are of insufficient volume.

III. Level 3 Input Data.- These are those that are not available in the market and are not observable. They will be used when the conditions indicated in article 9 of these provisions are present.

Article 7.- Price Providers must classify the Updated Price for Valuation they obtain 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 from 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 stated in the previous articles, Price Providers must consider, at least, the following elements:

I. The qualitative characteristics of the Security, financial instrument, and 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 derivative instruments, 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, will be responsible for determining that any of the circumstances indicated in the following sections 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.

If any of the circumstances indicated in the previous sections 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, and may request the opinion of the Bank of Mexico and the National Commission for the Retirement Savings System. 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 sections 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 require, 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 the disputes and observations formulated in writing by their Users, as well as attend to the observations made by the Commission, the Bank of Mexico, and the National Commission for the Retirement Savings System, in terms of said legal provision, regarding the Valuation Methodologies it uses or the Updated Valuation Prices it publishes.

The resolutions and attention to the observations indicated in the previous paragraph must be carried out on the same day of the presentation of the cited writing, when, in the judgment of the Users themselves, the Commission, and the aforementioned authorities, there are elements that allow supposing an incorrect application of the Valuation Methodologies used for the calculation and determination of said prices, or if they do not adequately represent the conditions of the Security, financial derivative instrument, or index. Price Providers must inform the Commission of the disputes and observations formulated by their Users, through an email sent to the address provprecios@cnbv.gob.mx, within the same deadline indicated in this paragraph.

When, as a result of the resolution of the disputes 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 Commission for the Retirement Savings System, 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 publicity carried out by Price Providers, when in its judgment it implies inaccuracy or obscurity, or for 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, are hereby repealed.

Respectfully,

Mexico City, August 12, 2020.- The President of the National Banking and Securities Commission, Juan Pablo Graf Noriega.- Signature.

Annex 1 Disclosures Related to the Determination of the Updated Price for Valuation

Price Providers, at the request of Users, must make the following information available to them:

I. The level of the Updated Price for Valuation hierarchy within which each Security, financial derivative instrument, and index is classified in accordance with the levels provided in article 7 of these provisions.

II. In the event that there is any change in the valuation model, that change must be disclosed along with the reasons for making it.

III. When there are changes in the classification of the Updated Price for Valuation hierarchy regarding the same Security, financial derivative instrument, or index, the following must be indicated:

a) Transfers between Level 1 and Level 2 of the Updated Price for Valuation hierarchy.

b) Transfers to or from Level 3 of the Updated Price for Valuation hierarchy.

IV. In the event that the circumstances indicated in sections I to III of article 9 of these Provisions are updated, the adjustments that have been applied, if any, to the Updated Price for Valuation must be explained.

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