The importance of close-out netting for cross-border
over-the-counter (OTC) derivatives markets cannot be
overemphasised. Market participants identify it as the
cornerstone of the OTC derivatives markets. The International
Swaps and Derivatives Association (Isda) identifies the
enforceability of close-out netting provisions as a key
initiative. However, local regulation on close-out netting can
be overly complex. As a result, foreign counterparties can be
left unprotected and there may be serious consequences when
their counterparties become insolvent.
In Colombia, article 74 of Law 1328 of 2009 mandates that
close-out netting is applicable to OTC derivatives transactions
entered into by Colombian counterparties and foreign entities,
in certain circumstances and subject to compliance with certain
procedural requirements. Non-compliance renders close-out
netting provisions inapplicable.
Some of the procedural requirements that are necessary for
close-out netting to be valid and applicable when dealing with
Colombian counterparties are contained in Decree 4765 of 2011.
They include the obligation for Colombian counterparties to
register OTC derivatives transactions with local authorities.
Herein lies the first problem with Colombian close-out netting
legislation: it is difficult for the foreign counterparty to
ensure that their Colombian counterparty will duly register
transactions in a timely manner. On the other hand, sometimes
parties (both Colombian and foreign) to an OTC derivatives
transaction are not aware of the nuances of these complex
Registration procedures vary depending on the type of
Colombian counterparty entering into the transactions. For
example, different registration procedures will be needed when
dealing with: financial entities which are foreign exchange
(FX) intermediaries (generally local banks and stock brokers);
financial entities which are not FX intermediaries (crucially,
pension fund administrators); trusts (popular in project
finance); and; corporates.
Registration procedures will also vary depending on the
underlying product. Even the Colombian authority with which
trades are registered will differ depending on the entity and
Careful drafting of Isda Master Agreement Schedules and
knowledge of the intricate registration rules and procedures is
crucial for the protection of any foreign entity when dealing
with Colombian counterparties.
Carlos Fradique-Méndez and Sebastián Boada