Colombian banking laws are the main regulations applicable to local derivatives and financial operations. In addition, Colombian foreign exchange (FX) regulations, issued principally by the central bank, regulate cross-border derivative operations. The central bank has traditionally assumed and applied local banking regulations and interpretations issued by the Colombian banking superintendency to FX transactions entered into by financial institutions.
The government has recently enacted Decree 1782 of August 28 2001, which provides that the legal nature and implications of sale purchase agreements are applicable to repo, buy/sell back operations, and temporary securities transfers (securities lending), when such transactions are entered into by local financial institutions.
Prior to the issuance of this decree, the banking superintendency (answering a consultation filed by the central bank who wanted to determine if cross-border repo operations were deemed to be secured loans or sale/purchase operations), had recognized that the legal nature of repos entered into by or with Colombian financial institutions is that of sale purchase agreements.
The main legal effect of Decree 1,782 is that repos, buy-sell back operations and temporary security transfers, under Colombian law, are viewed as the outright transferring of ownership of the underlying asset from the initial seller to the buyer. The implications are that:
- once the agreed terms are completed or verified, the initial buyer is obliged to sell the securities to the initial seller or, alternatively, different securities, but of the same type, class and amount;
- if the initial seller does not honour its obligation to pay the reacquisition price in the defined future date, the initial buyer is no longer obliged to sell back the securities;
- in the context of an insolvency procedure against the initial seller, the initial buyer has the right to keep as well as to sell such securities; and
- if the initial buyer does not honour its obligation to sell back the securities, the initial seller will no longer be obliged to pay the corresponding buy back price.
As a result of the new regulations, there is no risk in characterizing such transactions as secured loans when entering into them with Colombian financial institutions.