|Carlos Fradique-Méndez||Alejandro Galindo Hurtado|
With the issuance of Decree 4765 on December 14 2011, the Colombian government provided the necessary registration procedures for early termination and close-out netting provisions to be fully enforceable under over-the-counter derivative transactions. The registration procedures set out in Decree 4765 also enable a secured party to liquidate collateral upon insolvency of the counterparty without judicial proceedings.
Since the enactment of Law 1328 in July 2009, Colombian law allows for early termination, liquidation and close-out netting under OTC derivative transactions in the event the Colombian counterparty is subject to an insolvency proceeding, provided that at least one of the parties is either subject to the supervision of the Superintendence of Finance or an authorised foreign agent. Moreover, Article 74 of Law 1328 permits the secured party to seize collateral issued or located in Colombia without judicial proceedings, upon insolvency of the counterparty.
Before December 14 2011, however, the relevant provisions of Law 1328 were essentially unenforceable given that their application required OTC derivative transactions to be registered.
As a result, despite the existence of Article 74 of Law 1328, once an insolvency proceeding was instituted by or against the defaulting party, offsetting obligations under OTC derivative transactions required prior authorisation of the bankruptcy court. Likewise, if the secured party intended to liquidate cash and/or securities granted as collateral upon insolvency of the counterparty, the secured party had to enter the defaulting party's insolvency proceeding along with the counterparty's other creditors.
Decree 4765 filled this void by providing the registration requirements of OTC transactions along with a list of supporting documents which must be kept by the parties for the aforementioned provisions to be enforceable. In addition, the Decree also sets forth the procedures to liquidate collateral without judicial intervention.
Article 74 of Law 1328 and Decree 4765 jointly modify the general insolvency regime with respect to OTC derivatives, and represent a significant breakthrough in connection with early termination provisions and close-out netting under OTC transactions, allowing Colombian regulations to meet international finance standards.
Carlos Fradique-Méndez and Alejandro Galindo Hurtado