CNV Modifies Valuation Criteria for Foreign Currency Assets of Mutual Funds

The Argentine Securities and Exchange Commission (the “CNV”, after its acronym in Spanish) by means of Resolution No. 848 (the “GR 848”) dated July 15, 2020, reviewed the valuation criteria for mutual funds (the “FCI”, after its acronym in Spanish). This review originated at the request of the Argentine Central Bank (the “BCRA”, after its acronym Spanish) to the CNV on July 3, 2020, to review the regulatory criteria for valuation of funds and other assets denominated in foreign currencies that integrate the net worth assets of FCI in order to adapt them to the foreign exchange control regime established by Emergency Decree No. 609/19.

Below we will analyze the main changes to the regulatory criteria for valuation of FCI’s funds and other assets denominated in foreign currency:

 

I. Exchange Rate

GR 848 establishes that the conversion mechanism between the U.S. dollar and the Argentine legal tender, either for valuation of their holdings as well as other portfolio assets denominated in U.S. dollars, will be converted by the wholesale closing exchange rate that arises from the Electronic Operations System (the "SIOPEL", after its acronym in Spanish) run by the Electronic Open Market (the "MAE", after its acronym in Spanish) or the market by means of which the BCRA operates in the Single Free of Exchange Market (the “MULC”, after its acronym in Spanish), using the spot market exchange rate (T+0) or, if unavailable, the market exchange rate with settlement within 24 hours (T+1).

When valuing the holding of foreign currencies, or assets denominated in currencies other than the US dollar, the exchange rate in US dollars per unit provided by the BCRA should be considered as basis for conversion.

GR 848 eliminates the conversion mechanism by an alternative exchange rate previously established by General Resolution 771 (“GR 771”). This alternative exchange rate was calculated based on the price ratio of each of the assets of a given portfolio, dividing the price in legal tender by the price of the assets, or their underlying equivalents adjusted by the conversion rate, in U.S. dollars, and performing a weighted average by volume operated of that price relationship. In other words, the implicit exchange rate was calculated by dividing the price in Argentine pesos of a portfolio of assets over the price in U.S. dollars of that same portfolio of assets and was similar to the price generally associated with “blue chip swaps”.

 

II. Valuation Criteria of Assets Negotiated in Markets Authorized by the CNV

By means of GR 848, certain adjustments are introduced regarding valuation methodologies applicable to equity and fixed income assets offered in local and foreign markets in order to strengthen uniformity in the criteria implemented by different officers.

 

1. Equity Assets

Regarding equity assets, as long as they are authorized for trading in CNV approved markets, the following criteria is applicable:

(a) for equity, equity underwriting coupons and GDP-linked securities, the price at closing of the CNV authorized market with the largest transactions volume in the spot market, or the closing price of the foreign market with the largest transactions (applying the exchange rate mentioned in the paragraph above). If this is not possible, the price must be estimated according to reasonable business judgement;

(b) for the Argentine Deposit Certificates (“CEDEARs”, after its acronym in Spanish), the closing price of the CNV authorized market with the largest volume of transactions in the spot market with operated volume, or, if not, the price must be estimated using reasonable business judgment; and

(c) regarding financial trust participation certificates, GR 848 states that the expected cashflow must be adjusted applying a market rate reflecting the time value of money, amongst other factors, following a reasonable business judgement.

Regarding the CEDEARs, the valuation criterion by the closing price of the underlying asset in the foreign market with the most volume of transactions (discounting conversion costs), established by GR 771, is removed, maintaining only with effect the closing price of the CEDEAR within the CNV authorized market.

 

​​​​​​​2. Fixed Income Assets

Regarding fixed income assets traded in markets authorized by the CNV, the following criteria is applicable according to which “best reflects the realization price of the asset”:

(a) valued at the Relevant Price in the Relevant Transactions, if available. “Relevant Transaction” means those transactions carried out in markets authorized by the CNV: (a) with an aggregate traded volume at the end of the day of, at least, 100,000 UVAs (a unit of value published by the Argentine Central Bank which is adjusted by inflation); or, (b) with an aggregate face value traded at closing of at least 5% of the total issued face value of such security. “Relevant Price” means the average closing price for all settlement tenors in all markets authorized by the CNV, weighted by the total volume traded in each market;

(b) for public debt bonds issued under a foreign jurisdiction, the price of the foreign markets will be used, according to information published by reputable broadcast companies in said market (in accordance with Section G on “Prices Published in Foreign Markets”); or

(c) the realization price may be estimated using valuation methodologies that incorporate zero coupon yield curves through procedures, criteria and formulas tested and accepted by the international financial community, weighting recent market transactions of the asset and, where appropriate, of substantially similar financial instruments.

GR 848 eliminates the predetermined order established by GR 771 and established the applicability of the criteria abovementioned according to which “best reflects the realization price of the asset”.

 

​​​​​​​3. Assets Offered Exclusively in Foreign Markets

Regarding assets trading exclusively abroad (equity, debt, ETFs, investment funds, depositary certificates, amongst others), the value will be established by the foreign-market price that better reflects the realization value of said asset according to information published by reputable broadcast companies in said market (in accordance with Section G on “Prices Published in Foreign Markets”).

Regarding FCIs in Argentine pesos, such negotiable securities will be valued through application of the exchange rate indicated in Section I. (at the wholesale closing exchange rate that arises of the SIOPEL run by the MAE).

In addition, the valuation has to consider the tax and commercial costs related to the security, following a reasonable business judgment, so that the value reasonably reflects the realization value of the asset

 

III. Schedule for the Application

The CNV incorporates through GR 848 a schedule for the application of the new valuation criteria of FCI that are operating at the time of publication of GR 848:

• The changes with respect to the valuation criteria of the foreign currency holdings of FCIs will come into effect starting July 29, 2020, and
• Other changes regarding the valuation criteria of FCIs will come into effect starting October 15, 2020.