Resolution modifying the General Provisions on Liquidity Requirements for Multiple Banking Institutions

DOF: 28/12/2016

RESOLUTION modifying the General Provisions on Liquidity Requirements for Multiple Banking Institutions

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

The

Bank

of

Mexico,

based on

the provisions

of

articles

28,

paragraphs

sixth

and

seventh,

of the

Political Constitution

of the

United Mexican States;

96 Bis 1 of the

Credit Institutions Law,

as well as

24, 26, 36, 36 Bis and 47,

fraction I of the

Bank of Mexico Law;

1st, 4th,

first paragraph;

10, first paragraph;

14 in relation to

25, fraction VII,

and 14 Bis in relation to

17, fraction I,

of the Internal Regulations of the Bank of Mexico

and Second fractions IV and X of the

Agreement on the Assignment of Administrative Units of the Bank of Mexico,

and the

National Banking and Securities Commission,

based on the provisions

of articles

96 Bis 1 and 96 Bis 2,

last paragraph of the

Credit Institutions Law;

4, fractions XXXVI and XXXVIII;

16, fraction I and 19 of the

National Banking and Securities Commission Law,

and

CONSIDERING

That, for the calculation of the Liquidity Coverage Coefficient that

multiple banking institutions must perform in accordance with the

general provisions issued for this purpose jointly by the

National Banking and Securities Commission and the

Bank of Mexico,

these authorities, in concordance with the guidelines issued in the session of October 17, 2014, by the

Liquidity Regulation Committee referred to in

article 96 Bis 1 of the

Credit Institutions Law,

have considered it necessary to recognize more precisely the liquidity risk of the operations with derivative instruments that

multiple banking institutions enter into by means of the calculation performed in accordance with the method known as

contingent cash outflow for operations with financial derivative instruments (known in the global market as the Look Back Approach),

such that these institutions can maintain a level of liquid assets consistent with their collateral requirements practices and business models,

have resolved to issue the following:

RESOLUTION

MODIFYING THE GENERAL PROVISIONS ON LIQUIDITY REQUIREMENTS FOR MULTIPLE BANKING INSTITUTIONS

SINGLE.-

ANNEX 4 of the "General Provisions on Liquidity Requirements for Multiple Banking Institutions", published in the Official Journal of the Federation on December 31, 2014, modified by Resolution published in the said Official Journal on December 31, 2015, is REPLACED, to read as follows:

SECTIONS I to VI . . .

Annexes 1 to 3 . . .

Annex 4

Methodology for Determining Outflows and Inflows for Operations with Financial Derivative Instruments

Annex 5 . . .

TRANSITORY PROVISIONS

FIRST.- This Resolution shall enter into force on January 1, 2017.

SECOND.- Multiple banking institutions shall comply with the provisions of this Resolution starting from July 1, 2017.

THIRD.- Multiple banking institutions may implement the method provided for in Annex 4, fraction III, which is replaced by this Resolution, starting from its entry into force and until before the deadline contemplated in the SECOND TRANSITORY ARTICLE of this instrument, in accordance with the following:

I. Multiple banking institutions that intend to implement the aforementioned method starting from the entry into force of this instrument must notify the National Banking and Securities Commission no later than January 10, 2017.

II. Multiple banking institutions that intend to implement the aforementioned method after January 10, 2017, and until before the deadline indicated in the PREVIOUS SECOND TRANSITORY ARTICLE, must notify the National Banking and Securities Commission in the month immediately preceding the month in which they intend to adopt it.

Multiple banking institutions that perform the calculation in accordance with the method referred to in this transitory article shall be obligated to observe said method starting from the date on which they begin to perform that calculation, so they must refrain from continuing to follow the method contemplated in Annex 4 which is replaced by this Resolution.

Mexico City, December 20, 2016. - The President of the National Banking and Securities Commission, Jaime González Aguadé. - Signature. - BANK OF MEXICO: The General Legal Director, Luis Urrutia Corral. - Signature. - The General Director of Financial Stability, Pascual Ramón O'Dogherty Madrazo. - Signature.

ANNEX 4

Methodology for Determining Outflows and Inflows for Operations with Financial Derivative Instruments

To determine the outflows and inflows for operations with financial derivative instruments, Institutions shall apply the methodology indicated in this annex for each counterparty.

I. Flows for Over-the-Counter Derivatives without Netting Agreement with the Counterparty to be received or delivered in the next 30 days.

Only the inflow or outflow that is scheduled to be received or delivered, respectively, during the next 30 days shall be considered for over-the-counter financial derivative instruments that are not subject to a master agreement containing a clause that allows extinguishing by netting all derivative operations carried out under said master agreement.

Likewise, operations with said financial derivative instruments in which a winning position is maintained shall be added separately from those in which a losing position is maintained.

Inflows shall not be netted with outflows with the same counterparty.

The inflows and outflows (F) referred to in this section are defined as the contractual inflows and outflows that are scheduled to be received or delivered, respectively, during the next 30 days for over-the-counter financial derivative instruments.

Such flows must be calculated in accordance with the valuation methodologies used in each Institution on the date of the calculation of the Liquidity Coverage Coefficient.

The method for calculating the cash flow to be delivered or received for these operations shall be as follows:

I.1. Outflow for financial derivative instruments

II. Flows for Over-the-Counter Derivatives with Netting Agreement with the Counterparty to be received or delivered in the next 30 days.

Only the inflow or outflow that is scheduled to be received or delivered, respectively, during the next 30 days shall be considered for over-the-counter financial derivative instruments that are subject to a master agreement containing a clause that allows extinguishing by netting all derivative operations carried out under said master agreement.

Likewise, operations in said financial derivative instruments in which a winning position is maintained shall be added separately from those in which a losing position is maintained.

Inflows shall be netted with outflows with the same counterparty.

The inflows and outflows (F) referred to in this section are the contractual inflows and outflows that are scheduled to be received or delivered, respectively, during the next 30 days for over-the-counter financial derivative instruments.

Such flows must be calculated in accordance with the valuation methodologies used in each Institution on the date of the calculation of the Liquidity Coverage Coefficient.

The method for calculating the outflow and inflow for operations with financial derivative instruments shall be as follows:

II.1 Outflow for operations with financial derivative instruments

Outflows for operations with over-the-counter financial derivative instruments are composed of the following sum, whose components are defined below.

III. Determination of Contingent Outflow for Operations with Financial Derivative Instruments (Look Back Approach)

Institutions shall calculate the contingent outflow for operations with financial derivative instruments as the maximum absolute value of the sum of the amounts referred to in sub-paragraphs a) and b) below, calculating said sub-paragraphs for each consecutive thirty-day horizon during the last 24 months (Look Back Approach).

For each consecutive 30-day horizon, the following shall be summed:

a) The net accumulated collateral flow, which are the variations in the balance of collateral received minus the variations in the balance of collateral delivered, resulting from changes in the valuation of operations with financial derivative instruments, excluding variations in the balances of collateral delivered or received resulting from the posting of initial margins or the settlement of operations, plus

b) The accumulated variation in the market valuation of the portfolio of operations with financial derivative instruments corresponding to operations that are not covered by previously granted or received collateral or that have not been matched by an exchange of collateral.

For the purposes of determining the accumulated variation referred to in this sub-paragraph, Institutions may exclude those variations that result from the settlement of operations with financial derivative instruments that are part of the portfolio of operations provided for in this sub-paragraph that are equal in terms of the type of instrument, original maturity, underlying asset, and notional amount, but in which the exposure to market movements is contrary to operations considered in the previous sub-paragraph a).

Institutions that cannot identify the net accumulated collateral flow referred to in the previous sub-paragraph a) shall estimate the contingent outflow for operations with financial derivative instruments using only what is established in sub-paragraph b).

The requirement for the contingent outflows that Institutions may face for operations with financial derivative instruments referred to in this section shall be calculated considering both over-the-counter operations with financial derivative instruments and those traded on exchanges recognized by Mexican financial authorities.

This calculation shall be obtained on a daily basis, so it shall not be restricted to variations observed at the close of each month.

In terms of the above, the calculation of the contingent outflow for operations with financial derivative instruments referred to in this fraction III of the present annex shall be performed in accordance with the following equation:

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