June 8, 2020 / Banking and Finance Law
Circular 17/2020 – addressed to Multiple Banking and Development Banking Institutions, regarding the Rules applicable to repurchase transactions of government securities with Banco de México to cover liquidity needs.
Due to the circumstances derived from COVID-19 pandemic, a new provisional measure adopted by Banco de México (hereinafter, “Banxico”) was published in the Federal Official Gazette (FOG) on May 19. This measure is focused on continuing to promote the good development of the financial system and ensure its stability. Therefore, it is necessary to maintain the provision of liquidity in local currency in order to improve the functioning of national markets, strengthen credit granting channels in the economy, and promote the orderly conduct of the debt and foreign exchange markets in Mexico.
To achieve this goal, Banxico will contribute to the existence of the conditions that will allow credit institutions to comply with their main priority, which is to finance the economy. Therefore, Banxico has decided to offer credit institutions the possibility to execute repurchase transactions of government securities in order to provide liquidity to the government debt market and allow multiple banking and development banking institutions to obtain liquidity without selling their government securities under the stress conditions that prevail in the markets.
- Rules applicable to repurchase transactions of government securities with Banco de México to cover liquidity needs. (hereinafter, the “Rules”) .
- Conditions for the Granting of Financing:
The institutions interested in executing —in their capacity of sellers— repurchase transactions with Banxico, in accordance with the Rules, must submit their applications on the date and within the timeframe indicated in the calls Banxico makes for this purpose. Banxico will inform the Institutions of each of the aforementioned calls at least one Banking Day prior to the date in which Banxico will receive the aforementioned applications.
These calls will be published through SIAC-BANXICO system or Banxico website on https://www.banxico.org.mx/. In case such system is not available, Banxico will publish the calls through any other electronic, computing, or telecommunication means authorized for such purpose by the Bank itself, as informed to the Institutions. Such calls will specify the date and timeframe in which the Institutions may request the transactions subject matter of the Rules, as well as the determined available amount for such transactions. Banxico will issue the referred calls at least once per week during the effective term of the Rules or until the maximum amount that Banxico had determined is covered.
Institutions must submit the applications in the format attached to the Rules as Exhibit 1, through SIAC-BANXICO or the electronic or telecommunication means authorized by Banxico, on the date and timeframe indicated in the relevant call and in accordance with the procedure established in the Manual. Such call submitted through the means referred to in this paragraph must contain the advanced electronic signature of the legal representative of the institution having the powers to exercise acts of ownership, whose data may be verified through the relevant digital certificate issued by the Tax Administration Service, or through a document submitted at Banxico registered office, which contains the handwritten signature of the legal representative of the Institution having the powers to exercise acts of ownership.
Banxico will handle the applications that the Institutions submit in accordance with the previous paragraphs and will assign them the amount they requested, which Banxico will inform to the Institutions through any other electronic, computing, or telecommunication means authorized by Banxico itself for such purpose. In case that the application total amount exceeds the available amount, the allocation will be carried out on a pro-rata basis. In other words, it will be done proportionally to the positions each Institution presents. The disposition of the funds corresponding to the repurchases executed based on such allocation will be subject to the prior transfer of the securities subject matter of such repurchases in the relevant security deposit accounts that Indeval maintains with Banxico. The applicable accounts and timeframes will correspond to the specified ones in the Manual. The securities subject matter of the repurchase must be deposited on the Banking Day following the day on which the relevant Institution has submitted the allocated application in accordance with the Manual.
Regarding the development banking institutions, only those authorized may execute the aforementioned repurchases in accordance with the applicable regulations.
- Execution of Agreements:
To execute a repurchase agreement subject matter of the Rules, the interested Institutions must submit to the Management of Transaction Instrumentation of Banxico a certified copy of the deed evidencing the powers granted to their legal representatives to exercise acts of ownership, as well as the official identifications of such representatives subscribing such agreements and the other documents indicated in the Rules.
- Repurchase transactions:
In order for the relevant Institution to execute a repurchase with Banxico in accordance with these Rules, it must previously execute the relevant agreement with Banxico, which must have, at least, the following characteristics:
- Buyer: Banxico.
- Seller: the Institution applying and complying with all requirements.
- Deadline to execute the repurchase transaction.
- Repurchase deadline: 3 (three) months. It must not exceed 93 (ninety-three) calendar days.
- Securities subject matter of the repurchase: Government securities whose maturity date is subsequent to the deadline expiration date of the repurchase.
- Repurchase price: it will be the amount in local currency equivalent to the value of the securities subject matter of the repurchase disclosed by Banxico at the moment of its execution.
- Bonus: It will be the resulting from the formula established in the Rules and which will have as reference the following elements:
- Interest rate.
- Crediting of funds: Once the relevant Institutions had executed the agreement and submitted the application to execute the repurchase, such Institution must transfer the securities subject matter of the repurchase; and once the delivery of such securities is made through the transfer, Banxico —during the timeframe established in the Manual— will deposit the amount equivalent to the relevant Repurchase Price on the Single Account of the Selling Institution.
- Valuation of securities subject matter of the repurchase: The Selling Institution must give to Banxico, in virtue of the relevant purchase, the securities, which valuation adjusted by the discount factors must always be equal to or greater than the Repurchase Price plus the estimated Bonus by the repurchase transaction and any other agreed expense. For these purposes, the value of the securities will be determined in accordance with the relevant prices and discount factors that Banxico informs to the Institutions of through the Internet portal on the following link:<<http://webdgobc>>.
- Repurchase payment:
The Selling Institution may, prior to the expiration date agreed for the repurchase executed according to the Rules, pay all or part of the amounts payable under such repurchase. In these cases, the Selling Institution must inform Banxico of the foregoing, through a format communication elaborated for such purposes in accordance with the Rules, Exhibit 2, and within the timeframe indicated in the Manual. Once the repurchases mentioned in the Rules have been totally covered, the obligation of the Parties will be extinguished.
- Information for Banxico:
Institutions will carry out the acts established in the Rules, without prejudice to the power of Banxico to request from them, through the competent administrative units, the information it may require for the proper performance of its functions. The aforementioned information must be sent through the means and terms that, for such purpose, the administrative units inform.
The Rules became effective on May 19, 2020, and they will expire on September 30, 2020.
 Since this document is a summary of the content of Circular 17/2020 – Rules applicable to repurchase transactions of government securities with Banco de México to cover liquidity needs, there are some elements expressed in this document that may have a more detailed explanation in the original document. Therefore, we suggest accompanying this summary with the official content of Circular 17/2020 published in the Federal Official Gazette. https://www.dof.gob.mx/nota_detalle.php?codigo=5593485&fecha=19/05/2020