Circular 16/2020 – Rules applicable to securities lending transactions with Banco de México to enhance liquidity.
June 8, 2020 / COVID-19 /Banking and Finance Law
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, as well as to promote the proper functioning of the payment systems and avoid disruptions. Therefore, it is necessary to maintain the provision of liquidity in local currency for the credit institutions in order to enhance the functioning of the national markets, strengthen credit granting channels in the economy, and promote the orderly conduct of the debt and foreign exchange markets of Mexico.
To achieve the foregoing, Banxico will lend government securities to eligible Multi Banking and Development Banking Institutions, (hereinafter, the “Institutions”), for which they must deliver as collateral, among others, debt securities, through which the temporary exchange of securities referred to in the facility described in the communication of April 21, 2020, number 5, will be allowed. In addition, through such communication, Banxico announced additional measures to promote the orderly conduct of financial markets, strengthen credit-granting channels, and provide liquidity for the good development of the financial system. The procedural deadline for the securities loans will be 3 (three) months and it must not exceed 93 (ninety-three) calendar days. The institutions may request an extension as long as they comply with certain requirements established in this circular 16/2020, if applicable.
- Rules applicable to securities lending transactions with Banco de México to enhance liquidity (hereinafter, the “Rules”).
The Institutions may carry out securities lending transactions with Banxico so that such Institutions receive from Banxico Federal Treasury Certificates and Federal Government Development Bonds as a loan, subject to the granting of a collateral incorporated through a pledge or eligible securities.
Conditions to carry out securities lending transactions:
The Institutions interested in carrying out securities lending transactions with Banxico must submit their applications in the date and within the timeframe indicated in the calls that Banxico informs for these purposes. The applications must be submitted through SIAC-BANXICO or on Banxico website at https://www.banxico.org.mx/. 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.
In case of such system is not available, Banxico may inform of the calls through any other electronic, computing, or telecommunication means authorized by Banxico itself for such purpose, when Banxico informs it to the Institutions. Such calls will specify the date and timeframe in which the Institutions may request the performance of securities lending transactions subject matter of these Rules, as well as the available amount for each Federal Treasury Certificate and Federal Government Development Bond release and the total amount determined for such transactions.
The Institutions must submit the applications in the format attached to the Rules as Exhibit 1, in the date and timeframe indicated in the relevant call and in accordance with the procedure established in the Manual. The application must include the advanced electronic signature of the legal representative of the Institution that has the powers to exercise acts of ownership, whose data may be verified by means of the relevant valid digital certificate issued by the Tax Administration Service, or by 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 submitted by the Institutions pursuant to the previous paragraphs and will assign them the requested amount, of which Banxico will inform the Institutions through SIAC-BANXICO or any other electronic means. In case of the total amount of the applications exceeds the available amount for each release of the value indicated in the relevant call, the allocation will be made on a pro-rata basis, and the delivery of the securities, subject matter of the relevant loans, will be granted by Banxico to the debtor Institution and will be subject to the prior creation of a stock pledge to ensure the obligations of the debtor Institution under the relevant loan. The securities or funds subject matter of the stock pledge must be deposited on the Banking Day following the day in which the relevant Institution has submitted the application that has been assigned.
Regarding the Development Banking Institutions, only those authorized pursuant to the applicable regulations, may make the transactions referred to in these Rules.
Deadlines of the Loans:
The deadline for the security loans will be 3 (three) months. It must not exceed 93 (ninety-three) calendar days.
Early maturity of loans:
The parties may, at any time, agree the early maturity of the security loans they execute in accordance with the relevant agreement.
Eligible collateral, securities, and funds:
The Institutions must ensure the obligations they assume pursuant to the security loans executed with Banxico, by means of the creation of a stock pledge on any of the following securities:
- Government funds in Mexican pesos or UDIS;
- Debt securities in Mexican pesos or UDIS, deposited on Indeval, which comply with the National Scale Credit Rating, or, in the absence thereof, the Global Scale Credit Rating, and which have been issued by:
- State-owned entities of the Federal Government, including development banking institutions other than the lender and FIRA;
- Productive Companies of the State;
- Multi Banking Institutions, other than the lender, which are not part of the same financial group, business group, or consortium to which the lender belongs to;
- International financial organizations and multilateral entities;
- Non-financial entities residing in Mexico that are not part of the same financial group, business group, or consortium to which the lender belongs to;
- Institutional trust institutions issuing such debt securities as trust stock certificates representing: 1) rights over mortgage loan portfolios subject to such trusts or other trusts related thereto and have been granted by financial entities residing in Mexico, except for loans that have been granted by the lender or by financial entities of the same financial group, business group, or consortium to which the lender belongs; or 2) rights in favor of any State Productive Company;
- Trust institutions through which the persons indicated in items “a)” to “g)” of this section issue such debt securities as trust stock certificates representing the right of their holders to receive the capital payment, and interests, or yields, if applicable.
At the end of the deadline of the relevant security loan, each Institution must pay Banxico a commission that will be determined in accordance with the formulas stablished in detail in the Rules.
Value of securities and pledged securities.
Once the relevant allowances have been applied, the value of the securities or the pledged securities must always be equal to or greater than 100% of the sum of the value of the Federal Treasury Certificates and Federal Government Development Bonds subject matter of the relevant security lending transaction, calculated in the same terms, plus the amount of the estimated applicable commission.
Valuation of securities or pledged securities.
Banxico will perform a daily valuation of the securities or pledged securities, as well as those delivered to the debtor Institution under the security loan. For this purpose, Banxico will inform the value of the securities and funds subject matter of the loan and pledge, over which the discount factors determined by Banxico itself will be applied, and which will be disclosed through the Internet portal indicated on the website: http://webdgobc
Delivery of Government Securities Subject Matter of the Loan.
Once the relevant Institution had executed the agreement and submitted the application to carry out the loan, such Institution must transfer the securities or funds subject matter of the pledge referred to in the deposit security account that Indeval maintains for Banxico, in accordance with the Manual.
Once the delivery of such securities has been carried out by a transfer, Banxico will transfer the relevant Federal Treasury Certificates or Federal Government Development Bonds to the deposit security account that Indeval handles for the lender.
In case the relevant Institution does not pledge sufficient additional securities or values and the percentage is less than 100% of the sum of the value of the Federal Treasury Certificates or Federal Government Development Bonds subject matter of the relevant security lending transaction, Banxico will terminate early the security loan at issue and may agree with the Institution the execution of a new security loan for the remaining term of the security loan expired early, for the amount allowing the value of the securities or values delivered in stock pledge to be, once more, equal to or greater than 100% of the sum of the value of the Federal Treasury Certificates or Federal Government Development Bonds subject matter of the security loan at issue.
The interested Institutions must enter into a security lending agreement with Banxico in accordance with the Rules. They also must submit to the Transaction Instrumentation Management of Banxico a certified and uncertified copy of the deed evidencing the powers to exercise acts of ownership of the persons who intend to execute the agreement, as well as the uncertified copy of the official identifications, at least 3 (three) Banking Days prior to the date in which they intend to execute the referred agreement.
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 16/2020 addressed to Multi Banking and Development Banking Institutions, regarding the temporary facility for securities lending transactions with Banco de México, 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 16/2020 published in the Federal Official Gazette https://www.dof.gob.mx/nota_detalle.php?codigo=5593484&fecha=19/05/2020