CNV: Registration of Derivative and Repos for Netting and Reporting Purposes

The Argentine Securities and Exchange Commission ( the “CNV” after its acronym in Spanish) issued Resolution No. 775 (“Resolution 775”) which regulates the registration of derivative and repurchase transactions to make netting provisions effective. Resolution 775 was issued after the call for comments from the public on the proposed regulation made by General Resolution No. 758 (please see "The Argentine SEC Proposes New Regulations Implementing Netting and Derivatives Reporting").

 

This regulation will have a positive impact on the enforceability of close-out netting provisions in insolvency scenarios.

 

The regulation has two main purposes: (1) it creates the obligation for the entities under the competence of the CNV and the agents registered with the CNV (the “Obligated Parties”) to notify the Register of Derivatives Transactions of their derivative  and repurchase transactions, and (2) it provides that  markets and clearing houses have to create a Register of Derivative Transactions which will provide those registered derivatives and repurchase the special treatment provided in Title VIII of Law No. 27,440 (“Derivatives Regulation”), which includes the enforceability of close-out netting provisions in insolvency scenarios.

 

The registration for transactions involving an Obligated Party is a mandatory registration of the life cycle of the transaction, while the registration for those repurchase and derivative transactions in which no Obligated Party is involved is optional. In the first case, the purpose is regulatory and it is aimed mainly at introducing the obligation of certain parties to register their over-the-counter (“OTC”) derivative and repurchase transactions in a trade repository, following the global policy trend in this matter. In the latter case, the registration would grant the transaction with a qualification as a derivative or repurchase transaction governed by the Derivative Regulation.

 

Resolution 775 introduced several modifications that improved the proposed regulations based on comments from the public, most notably: repurchase agreements are included in the regulations, and the regulations for the mandatory registration by the Obligated Parties differ from the optional registration for the purposes of benefiting from the Derivative Regulations.

 

1. Obligation of Regulated Entities and Agents to Register their Derivative and Repo Transactions

The Obligated Parties must notify  the Register of Derivate Transactions of the execution, amendment (amount and term), final settlement and early termination of all derivatives and repurchase contracts entered into in bilateral form outside the markets authorized by the CNV (i.e., OTC contracts). The notification has to be made no later than the business day following the execution, amendment, final settlement or early termination of the agreement.

 

In those cases in which only one of the parties to the transaction is an Obligated Party, such party has the obligation to report the transaction. When both parties to the transaction are Obligated Parties, the obligation is on the party that is the “buyer” and in those cases in which the transaction is a swap, it is on the “seller” of the agreement.

 

The Register of Derivatives Transactions will have to be kept by a Derivatives Transactions Registration Entity or in its absence by the Markets and/or Clearing houses. The Register of Derivative Transactions must sort the information by type of contract and underlying asset.

 

The obligation to inform the derivatives transaction[1] will apply to those agreements executed after January 1, 2019.

 

2. Registration of Derivative and Repo Transactions for Close-out netting.

 

The regulation also provides that trade repositories (Entidades de Registro de Operaciones de Derivados), markets, and clearing houses must have a register for OTC derivatives and repurchase agreements. The derivative and repurchase transactions registered under such provision will benefit from the Derivatives Regulations.  

 

Law No 27,440 provides in Section 189 that three types of derivatives and repurchase agreements will benefit from the Derivative Regulations:

 

1. Those executed and/or registered in markets authorized by the CNV if the settlement of those transactions is carried out through the market, clearing house or central counterparty;
2. Those executed and/or registered in markets authorized by the CNV, if the settlement of those transactions is not carried out through a market, clearing house or central counterparty; and
3. Those executed between local and/or foreign counterparties outside a market authorized by the CNV if such transaction complies with the registration formalities set forth by the CNV.

 

The derivatives and repurchase agreements registered with markets and clearing houses under Resolution 775 will be included in the last situation.

 

The Derivative Regulations provide that the parties to these derivative and repurchase transactions, in the event that their counterparty enters into an insolvency procedure under the Bankruptcy Law, will be entitled to exercise their rights under the contract regarding early termination, settlement, set-off and the enforcement of margin for the net amount owed. Therefore, the close-out netting provisions would be enforceable in insolvency scenarios for these derivatives and repurchase transactions.

 

The Derivative Regulations also includes certain provisions which would allow the counterparties of a derivative and repurchase with financial institutions to enforce their contractual rights, if certain conditions are met, in the event the financial institution is suspended or is subject to reorganization by the Argentine Central Bank.

 

This registration is not mandatory, but if the derivative or repurchase agreement is not registered, it will not benefit from the Derivative Regulations.

 

Any individual or entity who is not an Obligated Party can register the execution, final settlement and early termination of derivative and repurchase agreements entered into in bilateral form outside exchanges authorized by the CNV (OTC).

 

The parties to the contract have to agree which party will register the agreement. The information has to be filed within five business days after the execution, final settlement or early termination, provided that the counterparty is not insolvent.

 

As from January 1, 2019, the parties may also register the derivative contracts which are outstanding as of such date and which have been executed after the enactment of Law No. 27,440.

 

3. Minimum Content of the Registration

 

The Register of Derivatives Transactions requires the following information: date, tax ID of the parties, the buyer and seller (in case of swap, referring to the underlying asset), type of contract, underlying asset, nominal value, settlement currency, term, maturity date and choice of jurisdiction.

 

The entity keeping the Register of Derivatives Transactions must allow for remote delivery of the information with the security measures that it deems appropriate to guarantee its authenticity. The confirmation of registration issued by the entity keeping the Register of Derivatives Transactions will be sufficient evidence of the effective registration of the contract.

 

Any party to the transaction will be authorized to access the information related to the execution, amendment (amount or term) final settlement and early termination, and promptly correct it.

 

4. Reporting to the Authorities

 

The entities in charge of the Derivate Transactions Register must include the information to be required by the Argentine Tax Authority  in its Regime for the Registration and Information of Transaction related to derivatives. These entities will also have to submit to the CNV, on a monthly basis, the information contained in their records.