|Carlos Fradique-Méndez||Sebastián Boada Morales|
The Colombian Central Bank (Banco de la República de Colombia or BRC) is the regulatory authority in charge of foreign exchange (FX) matters. As such, it is in charge of overseeing the Colombian cross-border derivatives market and the local derivatives market related to FX operations. Contracts for difference (CFDs) are generally defined as derivatives products that allow investors to take a position on the changes in value of an underlying asset. Until recently, Colombian regulation did not consider these types of products to be financial derivatives.
In Colombia, CFDs are not regulated by statute. They belong to a type of contract known as atypical contracts; namely, those that have not been defined by an act of Congress. Notwithstanding this nature, the BRC has classified CFDs by interpretation; first as margin accounts and later as financial derivatives.
The BRC issued Opinion JDS-03409 on February 16 2011. This defined CFDs as a type of contract known locally as a margin account; tantamount to a margin FX instrument but with the possibility of having several different underlying products. The BRC differentiated CFDs from derivatives in Colombia based on the following:
- CFDs do not have a maturity and settlement date defined from the outset. This contrasts with derivatives, which have a maturity and settlement date set out from the beginning.
- CFDs are similar to futures in that they contain variation margin, although futures are subject to central counterparty clearing while CFDs are not.
The promotion and trading of CFDs with Colombian counterparties was thus subject to regulation on local margin accounts.
However, on September 12 2016, the BRC issued Opinion JDS-19704 whereby it redefined CFDs as derivatives products. The BRC did not refer to its previous Opinion 3409, and it did not differentiate the two opinions to evidence the interpretative change. The BRC went on to provide the statutory definitions of a financial derivative and stated that according to the description of the financials of CFDs, these products fit into the category of a financial derivative under Colombian regulation.
As of September 2016, CFDs receive the regulatory treatment of derivatives instruments and thus their cross-border trading with Colombian counterparties is subject to new rules. By way of example, now Colombian clients may only enter into these products with foreign counterparties which qualify as so-called authorised foreign agents under local regulation.
Foreign traders looking to offer these products to Colombian clients, or enter into these types of products generally, must be aware of the new legal requirements imposed by the BRC's change of interpretation.
Carlos Fradique-Méndez and Sebastián Boada Morales