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Spain

Until now, investments made by Spanish Collective Investment Institutions (IICs) in derivatives were regulated by the provisions of the Order of July 6 1992. This rule allowed such institutions to invest in derivatives traded on organized secondary markets both in Spain and in other countries.

Now, however, the global development of the financial markets and the difficulty Spanish IICs have had in competing have highlighted the inadequacy of the previous regulatory regime.

In response to this, an Order was issued on June 10 1997 repealing the 1992 Order. The basic aim of the Order is to make it easier for IICs to invest in derivatives by enabling them henceforth to make use of derivatives traded over the counter (OTC).

Specifically, the Order of June 10 1997 establishes a regulatory scheme based on the principles described below.

First, definition of the objectives which can be sought in investment operations making use of derivatives and specification of the instruments which can form the object of these investments (although the Comisión Nacional del Marcado de Valores (CNMV) — the Spanish Securities Exchange National Commission — has the power to add further criteria arising). Under the terms of the Order, ICCs are authorized to invest in the following:

  • Futures traded on organized derivatives markets over interest rates, exchange rates, shares, dividends or market indices.
  • Options traded on organized derivatives markets over interest rates, exchange rates, shares, dividend or market indices.
  • Future purchases/sales over interest rates, exchange rates, shares, dividends or market indexes, not traded on organized derivatives markets, including future interest rate agreements (FRAs) and future purchases/sales of fixed-income securities.
  • Options on interest rates, exchange rates, shares, dividends or market indices, not traded on organized derivatives markets, including warrants, options with an upper limit (caps) and options with a lower limit (floors).
  • Swaps involving interest rates, exchange rates, shares, dividends or market indices, whether or not registered and settled on organized derivatives markets.
  • Structured operations, whether or not on organized derivatives markets, resulting from the combination of two or more derivative instruments set forth in the preceding sections.

Second, rules on the management of market risk are established, and the following guidelines are laid down to measure the counterparty risk:

  • Overall undertakings for operations involving derivatives cannot at any time exceed the net worth of the IIC.
  • Under no circumstances may the premiums paid for options purchased exceed 10% of the net worth of the IIC.
  • These limits may only be exceeded when the IIC intends to achieve a specific yield objective which has been guaranteed by a third party.
  • In the event these limits are exceeded due to causes beyond the control of the IIC, the situation must be corrected within a maximum of 15 days.
  • At no time may the FIAMMs use derivatives for any purpose other than for coverage.
  • Escrows and other liquid amounts subject to the completion of these operations shall not be calculated into the liquidity co-efficient required of FIMs and SIMCAVs.

Third, the following requirements are also established for operations in derivatives not traded on organized markets:

  • The purpose of these operations must be exclusively for coverage.
  • The counterparties must be financial entities with their registered offices located in OECD member states, and must be subject to prudential supervision, habitually and professionally engage in operations of this type, and have sufficient solvency.
  • Orders may be voided at any time on request from the IIC, by way of their automatic settlement or assignment to a third party.
  • The contract clauses for these operations must include precise documentation as regards the valuation methods.
  • When the counterparty belongs to the same group of companies as the Management Company and Depositary of the IIC, it must be proven that the operation is carried out at market prices.

Fourth, as regards operative risk, the rule establishes a set of internal control obligations for management companies, which must take greater care in operations which fall under this Order, and in addition must:

  • have experts with proven experience in the field, or else hire the services of external advisers with such experience;
  • have qualified professional knowledge;
  • prepare an investment plan and gather the necessary information to carry it out;
  • check the consistency of the operations with the investment policy as communicated to stockholders or participants; and
  • carry out continuous follow-up monitoring.

Finally, a series of supervision and transparency rules are established, consisting of the following:

  • The requirement to supply periodic information to the CNMV of such scope and content as the Commission may determine.
  • The obligation to provide information to participants and investors referring broadly to this type of operation, in conformity with the rules established by the CNMV, in quarterly reports and the annual report, and included in the IIC's prospectus, in the section on investment policy, with a detailed explanation of the goals sought with this type of operation, the nature of the operations carried out or intended to be carried out and the maximum limits of risk assumed by the IIC.

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