Central Bank Relaxes Regulations on Commodity Derivatives

Since 2002, foreign currency exchange restrictions have been enacted in Argentina and they are still applicable. Under such restrictions, derivative transactions have been heavily regulated and limited. As a general rule, the regulations of the Banco Central de la República Argentina (the “Central Bank”) require the prior approval of the Central Bank for Argentine residents to enter into, and to purchase foreign currency with Argentine pesos in Argentina to effect payments under, a future, a forward, an option or any other kind of derivative transaction with a non-resident, unless the transaction qualifies for one of the exemptions granted by those regulations. The Central Bank has made it clear that this prior approval requirement applies even if the transaction does not involve any purchase of foreign currency in the Argentine foreign exchange market by the Argentine resident.

The Central Bank regulations are aimed at restricting the access of local residents to offshore derivative markets while favoring domestic derivative markets. The Central Bank regulations are far more restrictive with over-the-counter derivative transactions which are settled outside Argentina or are governed by a foreign law (“Foreign Derivatives”) than with over-the-counter transactions which are settled in pesos in Argentina under Argentine law (“Domestic Derivatives”). Prior to Central Bank Communication “A” 4743 (“Communication 4743”), only Foreign Derivative for certain hedging purposes were authorized (basically hedging of interest rate and currency risks between foreign currencies (i.e. excluding the peso) related to indebtedness with foreign residents, and commodity prices related to foreign trade transactions) while all Domestic Derivatives were authorized.

Communication 4743 is aimed at providing liquidity to the domestic derivative market by relaxing the requirements for commodity Foreign Derivatives entered by local financial entities to hedge certain commodity Domestic Derivatives. Communication 4743 authorizes local financial entities to enter into Foreign Derivatives to hedge commodity Domestic Derivatives entered into with local companies, provided that certain requirements are met, including the following significant ones:

(i)                   the Foreign Derivative and the Domestic Derivative must be entered into on the same day and must mature on the same day;

(ii)                 there is no Argentine local market in which such transaction can be entered into;

(iii)                the Domestic Derivative must hedge the price of commodities that are supplies or directly affect the costs of the supplies used by the company in its production process; and

(iv)                the Domestic Derivative must be cash settled in pesos even in an event of default.