This content is from: Local Insights

Colombia: A good year for OTC

Carlos Fradique-MéndezFelipe Isaza
The Colombian derivatives market has been growing since 2006. According to data provided by the Colombian Central Bank, last year was record-breaking for the over-the-counter (OTC) derivatives market, with $279 billion traded up to September 2013.

Last month, the Colombian Superintendence of Finance proposed a new regulation intended to modify certain existing regulations regarding the derivatives industry. The draft was expected to be issued in July and it may have an important impact on the negotiation of these instruments, especially on OTC derivatives.

This new regulation seeks to amend a side effect of another regulation issued recently. Since 2013, Colombia has implemented so-called price vendor rules on the creation of independent entities in charge of providing prices for all instruments negotiated on the Colombian stock market. This idea, based on the Mexican experience, intends to improve portfolio valuation and market transparency by preventing the co-existence of different valuations of the same securities across different portfolios and entities, while also improving market volume information.

Further, it is expected that, following the enactment of this new regulation, the local Central Counterparty Risk Chamber (CCRC) will make its own price valuations without the price vendor. The main change concerning derivatives regulation is that the CCRC will be in charge of the clearing and settlement of all derivatives transactions, including OTCs.

Likewise, another modification under the proposed regulation authorises the CCRC to clear and settle financial derivatives and structured products only at maturity whenever the CCRC is brought as counterparty. For that reason, the valuation of these instruments will affect the financial entities' accounting practices. Lastly, the amend does not consider any change allowing CRCC to serve as counterparty on international derivatives transactions and that will continue to be the case under the proposed amendment.

Finally, after the 2008 Financial Crisis, G20 made some recommendations adopted by several regulations. The Dodd-Frank Act sets clearing requirements for OTC derivatives (swaps according to that regulation) depending on the underlying derivatives. According to the Act and above-mentioned regulation, some swaps must – be cleared in a derivatives clearing organisation (credit default swaps and interest rate swaps – fixed and floating, forward rate agreements and some overnight index swaps with dollars, euros, British pounds and yen). The proposed amendment follows this recommendation, adjusting local regulations along the same lines.

Carlos Fradique-Méndez and Felipe Isaza

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