|Carlos Fradique-Méndez||Sebastián Boada Morales|
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.
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 the product.
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 Morales