|Carlos Fradique-Mendez||Laura Zarzur|
Formerly, the receptor of the security was authorised to choose the collateral among a particular set of less liquid securities, which caused a lack of market penetration of temporary transfer of securities (TTVs), a problem exacerbated by the low quality of collateral used in TTV transactions.
Stock lending in Colombia operates under similar rules to other emerging market jurisdictions, whereby the originator transfers the property of the securities to the receptor, who in turn, on a pre-established date, must retransfer securities of the same kind and features to the originator. In exchange, the receptor agrees to pay a premium to the originator and to provide collateral of their choice: cash or other securities. As a result, the receptor obtains the right to freely use the received securities until the expiration date.
On these terms, under the Colombian regime, the general stock lending theory applies: TTV operations allow the receptor to retransfer same-kind securities, but not necessarily the same securities originally transferred. This allows the receptor to engage in short-selling trading of the received securities. Please note that in Colombia TTV operations are the only authorised mechanism to enable short-selling trading. This is because in repurchase transactions (repos), the mobility of securities is restricted, and buy- and sell-back transactions (simultaneous operations) may only be executed in connection with bonds.
The recent amendment introduces two main innovations. It: i) refines the list of acceptable collaterals by giving priority to more liquid alternatives; and, ii) gives the originator the faculty to choose the collateral – previously, this was the sole decision of the receptor. These two simple, yet powerful, innovations have the potential to reduce credit risk associated with TTV operations, and simplify the collateral negotiation process.
Poor quality collateral and the complexity of the negotiation process had been roadblocks for international and institutional investors, preventing them from fully engaging in local TTV markets. With this amendment, the stock exchange aims to remove both obstacles without increasing costs to the potential originator, triggering a material improvement in the liquidity of the market.
The efforts made by local regulators constitute an improvement for Colombian securities short selling, as it will allow the market to correctly and efficiently reflect the agent's true expectations of the prices of securities.
Carlos Fradique-Mendez and Laura Zarzur
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