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Colombia: OTC derivatives market expanded

The Colombian Central Bank recently issued Regulation 1 of 2018 to replace Regulation 8 of 2000, updating the regulation applicable to derivative operations in Colombia. Regulation DODM-144 was also adjusted to reflect such changes and to clarify the procedures required for the reporting of these operations to the Central Bank.

The main objective of this modification was the modernisation of the derivatives regime, as previous regulations were issued under different macroeconomic circumstances 18 years ago, when the Colombian derivatives market was very small. As the market became bigger and more sophisticated, participants required rules that allowed them to engage in new operations that that were not clearly authorised under previous rules. Thus, the need of market participants to keep up with the international markets with new and innovative investment and hedge mechanisms largely drove this initiative.

The main changes to the regulation concerned the counterparts to cross-border derivative operations, the types of contracts allowed, the underlying assets that are authorised, the terms of settlement and payment of operations and the modifications that may be made to existing transactions. Under previous regulations, only futures, forwards, swaps, caps, floors and collars were authorised and only interest rates, exchange rates and stock indexes were permitted as underlying assets for these operations. Additionally, cross-border derivatives between Colombian residents and authorised foreign agents could only be settled and paid on a non-delivery basis and in foreign currency.

These restrictions were eliminated to enable the parties to determine all the terms and conditions that were applicable in their operations. In fact, parties may now enter into any kind of derivative operation over any underlying asset, with settlement and payment both on a delivery or non-delivery basis, and in foreign or local currency. Additionally, rules applicable to credit default swaps (the only credit derivative operations authorised in Colombia) were also adjusted to ease the terms in which they may be engaged by Colombian financial entities.

The Colombian legal environment is now closer to international trends and acknowledges the needs that economic agents have in cross-border operations. Because of this, Colombian agents (mainly Colombian financial institutions) will be engaging in new operations on a larger scale, which will make the local market much more attractive for foreign capital.

Eduardo Gómez

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