Colombian banks are fighting new termination rights in over-the-counter (OTC) derivatives caused by an imminent International Swaps and Derivatives Association (Isda) opinion on the country’s new close-out netting rules.
Since Decree 4765 took effect last December, Isda has discussed the rules with Colombian counsel and counterparties to determine if a clean opinion can be given on their enforceability under the Isda master agreement.
The requirement that derivatives trades be registered to benefit from close-out netting is preventing an unqualified opinion. Foreign counterparties have responded by demanding early termination rights if the Colombian counterparty does not provide evidence of registration within 15 minutes of executing a trade.
“We are currently negotiating with Brazilian and Japanese banks and we are in this situation. It’s hard to find a middle point,” said Banco de Bogotá counsel Jorge Adrian Rincon Plata.
Banks are having to manage this with every OTC counterparty and are looking for solutions on how to ensure the close-out works. “This is hard for us,” Rincon Plata said, “but that’s the situation that we have now and we are just trying to live with it.”
Foreign counterparties are asking for a covenant obliging the local party to register the transaction, a representation that it will be registered, plus the additional termination event.
Isda’s Colombian counsel Gómez-Pinzón Zuleta is expected to provide a draft opinion to Isda by Friday March 30th. This will be circulated internally and any subsequent changes will be made before the final opinion is made public.
Counterparties have sought these contract changes based on discussions on an Isda teleconference in January which involved up to 70 participants.
Registration debate
Originally, the close-out netting rules were seen as a breakthrough in Colombia’s derivatives regime, which until then required court-authorisation of OTC offsetting provisions for them to be effective.
But the registration requirements have now become the focus. Decree 4765 requires each OTC cross-border derivative transaction to be registered with the central bank or, if the counterparty has access, with one of the four private registries that fall under the surveillance of the Superintendencia Financiera de Colombia.
The purpose of registration is to give a bankruptcy trustee evidence of all close-out netting rights that existed before the counterparty’s insolvency. It’s intended to deter those looking to free ride off the new rules.
But Rincon Plata said the solution was not working. He queried why the December decree couldn’t have allowed for an automatic registration instead.
However Ricardo Fandiño De La Calle, partner at Isda’s counsel Gómez-Pinzón Zuleta, said registration should not be an extra requirement for bank counterparties: “From a bank regulatory perspective they have been obliged for some time to register all transactions immediately after they enter them.”
This is to help the central bank keep track of foreign exchange and foreign indebtedness. For the same reason, non-bank counterparties have a similar obligation but they have until 10am the following business day to register.
Registration breaches are penalised through fines, but banks are finding it difficult to accept termination rights.
Local counsel tried for a number of years to give foreign counterparties access to Colombia’s registries to allow them to register trades. But the central bank’s inability to enforce against foreign entities led it to reject these claims.
In addition to the registration requirements, the upcoming Isda opinion will confirm the status of trades that preceded Decree 4765 . “Our opinion is that those transactions won’t benefit from the close-out netting rules that came out last year,” Fandiño De La Calle said.