The Argentine SEC Proposes New Regulations Implementing Netting and Derivatives Reporting

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

 

The proposed regulation has two main purposes: (1) it creates an obligation for the entities under the competence of the Argentine Securities Exchange Commission (the “CNV” after its acronym in Spanish)  and the agents registered with the CNV (the “Obligated Parties”) to notify the Register of Derivatives Transactions their derivative transactions, and (2) it allows the markets and clearinghouses to create a Register of Derivative Transactions which will provide those registered derivatives with the special treatment provided in Title VIII of Law No. 27,440 (“Derivatives Regulation”), which includes the enforceability of close out netting in insolvency scenarios.

 

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

 

 

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

 

The Obligated Parties must notify the Register of Derivate Transactions the execution, amendment, settlement and termination of all derivative contracts entered into in bilateral form outside the markets authorized by the CNV. The notification has to be made no later than the business day following the execution or amendment of the agreement.

 

In those cases in which only one of the parties to the derivative 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 of the party who is the “seller” and in those cases in which the transaction is a swap, the “seller” of the fixed rate.

 

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 Clearinghouses. The Register of Derivative Transactions must allow the aggregation of the information by type of contract and underlying asset.

 

The obligation to inform the derivatives transaction will apply to those agreements executed after October 1, 2018.

 

 

            2. Registration of Derivative Transactions for Close out netting.

 

The proposed regulation also allows markets and clearinghouses to issue regulation creating the Register of Derivative Transactions provided in Section 189 c). The derivative transactions registered under such provision will benefit from the Derivatives Regulations.   

 

Law 27,440 provides in Section 189 that three types of derivatives will benefit of 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, clearinghouse 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, clearinghouse 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 registered with markets and clearinghouses under the proposed regulations will be included in the last situation. Law 27,440 also provides for a special treatment under its Title VIII for registered repurchase transactions. However, repurchase transactions have not been included in the proposed regulation.
 

The Derivative Regulations provide that the parties to these derivative transactions, in the event its 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 transactions.

 

The Derivative Regulations also includes certain provisions which would allow the counterparties of a derivative 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.

 

 

            3. Minimum Content of the Registration

 

In all cases, whether the registration is mandatory or optional, the Register of derivatives Transactions must require at least the following information: place and date of execution, involved parties, type of contract, underlying asset, settlement currency, amount, and maturity date.

 

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

 

 

            4. Reporting to the Authorities

 

The entities which keep the Derivate Transactions Register must include the information to be required by the Argentine Tax Authority (the “AFIP” after its acronym in Spanish) in its Regime for the Registration and Information of Transaction related to derivatives. These entities will also have to submit the information contained in their records to the CNV, on a monthly basis.

 

 

            5. Deadline for Implementation

 

The proposed regulation provides that the Obligated Parties must start reporting their derivative transactions executed after October 1, 2018. Accordingly, the proposed regulations impose Clearinghouses and Markets with the obligation to prepare their systems by October 1, 2018 to include the minimum information required for the registration of the derivatives transactions by the Obligated Parties.