This content is from: Local Insights

Foreign investors and OTC derivatives

Carlos Fradique-MéndezLaura Villaveces Hollmann

A new Colombian foreign investment regime allows foreign investment to be carried out through a variety of vehicles. The former Foreign Investment Portfolio Funds, have been eliminated, and new regulations now allow certain companies to be appointed as representatives of foreign investors, using alternative structures that do not require prior authorisation from the Colombian authorities.

These amendments will have a significant impact on the derivatives market, which is wholly regulated by foreign exchange provisions. While under previous regulations foreign investors were not allowed to enter into OTC derivatives, the new regulations permit them to execute OTC derivatives by means of a representative, but who would be acting through the account held by such foreign investor in Colombia.

Such an amendment, as simple as it may sound, could have important consequences in the derivatives market. The prevailing interpretation has assumed the authorisation has been given only to the extent that such a foreign investor acts solely through its local account, without comprising all assets and liabilities of the foreign entity. This fact is determinant as it has a direct impact on the type of agreement, the permitted underlying assets (local treasury bonds), foreign exchange matters, tax considerations and the applicability of certain events of default and termination events. On the tax front, regardless of the purpose of the rule to simplify procedures, there are a number of uncertainties as to the tax treatment and compliance with tax obligations in respect of the alternative structures now available to foreign investors.

Inconsistencies between the interpretation of the regulators and the business perspective of those willing to execute derivatives locally have recently arisen in the market. Market participants believe the new regulations allow foreign investors to play locally, as Colombian residents, in respect of derivatives, which would eliminate restrictions in respect of underlying assets, settlement type and currency, among others. However, the regulators have sustained the view that such a purpose would certainly entail a contradiction, by allowing any foreign entity to act locally under the prerogatives applicable to local residents. In short, the new amendments would be eliminating, by this means, the applicability of the foreign exchange regime to which foreign counterparties are subject.

Carlos Fradique-Méndez and Laura Villaveces Hollmann

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