The gray market and the public debt exchange

“Gray Market” is the market where transactions with securities that have not yet been issued, but have already been priced, are carried out.Such transactions are subject to the condition that such securities are effectively issued (commonly referred to as “when and if issued” modality).In other words, it is a transaction subject to a condition.

The gray market in the Mercado de Valores de Buenos Aires S.A. (“Merval”) is governed by Merval Circular No 3356 (the “Circular”).The Circular establishes two main principles regarding transactions in the gray market.The first principle states that such transactions can only be executed as of the day after the pricing of the securities, and until the date of their issuance (the following day the new securities would be effectively listed and negotiated).This results, inter alia, in gray market transactions being settled on the date of the securities’ settlement.Second, execution of the transaction by the parties is always subject to the condition that the securities be effectively transferred by the seller to the placement agents.If for any reason such transfer does not take place, the gray market transactions would terminate without any rights or compensation in favor of any of the parties.Lastly the Circular establishes that gray market transactions must be individually authorized by the Merval.

Communication No 11,372 of the Merval dated March 3, 2005 authorized the gray market for Par and Discount bonds in U.S. Dollars and Argentine Pesos, along with their corresponding GDP linked securities (these cannot be separately negotiated for a six-month period), to be issued within the framework of the public debt exchange set forth in Decree No 1735/2004 and established April 1, 2005 as the date for settlement of such transactions.

On March 21, 2005, Thomas Griesa, Federal Judge of New York, issued an attachment in the suit “NML Ltd. vs. República Argentina” for the amount of US$ 7,000 million over the old bonds delivered by the creditors within the framework of the debt exchange.Subsequently, on March 29, the same judge resolved that the attachment did not proceed in the understanding that the duty to cancel the securities was inseparable from them and, therefore, such bonds cannot be attached.Despite this, the attachment was not lifted since NML appealed the decision and such appeal suspends the proceedings until the Court of Appeals issues a decision on the matter.

Judge Griesa’s attachment provoked the suspension of the issuance of the new bonds until the Court of Appeals decides on the matter.For this reason, the new bonds were not delivered by the Argentine Government on April 1, 2005, as had been expected.

Invoking the fourth clause of the Circular, the Merval issued Communication No 11,397, stating that the Merval’s Board of Directors resolved to terminate the gray market transactions related to public debt exchange as a result of the non-occurrence of the condition to which the gray market transactions were subject.

It should be noted that the same did not occur with the rest of the markets that carried out gray market transactions with the new bonds.Both in the Mercado Abierto Electrónico (“MAE”) [through MAE Resolution "C" 1203, Art. 2(3)] and in the non-Argentine self regulated markets(as set forth by EMTA – the Emerging Markets Trading Association), a 180-day period was established for the issuance of the new bonds to take place, counted as from the settlement date set forth in the prospectus (i.e., until October 1, 2005).If such term expires without the issuance of the new bonds, the transactions in such market shall also terminate.

The disparity of conditions in the different self-regulated markets determined the existence of winners and losers with respect to the transactions, in the gray market, of the Par and Discount bonds in Argentine Pesos and U.S. Dollars, along with their corresponding GDP linked securities, to be issued within the framework of the public debt exchange set forth by Decree No 1735/2004.Lastly, the different participants in the market that entered into transactions through different markets have obtained to date, diverse results with some transactions pending while others have been terminated.