Circular 2/2007 of the Bank of Spain. Public Debt Market in Book Entry (BOE of February 14)

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Circular 2/2007, of January 26, of the Bank of Spain. Public Debt Market in Book Entry (BOE of February 14)

Royal Decree 505/1987, of April 3, established a book entry system for State debt and the organization, within it, of a Central Book Entry system managed by the Bank of Spain. Subsequently, Law 24/1988, of July 28, on the Securities Market, as amended by Law 44/2002, of November 22, on measures to reform the financial system, attributes to the Management Company of the Securities Registration, Clearing and Settlement Systems (hereinafter, the Systems Company) the keeping of the accounting register, as well as the clearing and settlement, of securities admitted to trading on the Public Debt Market.

Pursuant to the first transitional provision of Law 44/2002, once the Systems Company has effectively assumed the functions attributed to it (in particular, regarding the management of the registration and settlement system for securities admitted to trading on the Public Debt Market), it is appropriate, while maintaining due coordination with the aforementioned Systems Company, to replace the current regulations, integrating and systematizing in this Circular the aspects related to the trading and contracting of the Public Debt Market pursuant to the functions attributed to the Bank of Spain.

Likewise, the aim is to update the operations of account holders regarding double operations, adapting current regulations to market circumstances. Therefore, from the two types of operations generically called "double" (the sale with repurchase agreement repo, and simultaneous sale), the possibility of formalizing repos between account holders is excluded.

In view of the foregoing, the Bank of Spain has issued this Circular.

FIRST RULE.

Account holders and managing entities

The Ministerial Order of May 19, 1987, which develops Royal Decree 505/1987, of April 3, establishes in its articles two and five the requirements that entities must meet to access the status of "account holder" or "managing entity," respectively, in the Public Debt Market in Book Entry. In addition, they must be obliged to submit to the Bank of Spain an application accompanied by an activity report describing their participation in the trading of public debt, and make available to them any information they may request in order to know their financial situation and solvency, and their professional, organizational, and technical endowment to carry out the commitment inherent to the status they are applying for, as well as to maintain the commitments derived from compliance with the operating rules of the Systems Company.

SECOND RULE.

Secondary Market Operations

1. Secondary Market Operations in Public Debt in Book Entry:

a) Simple cash sales

Simple cash sales operations shall be considered those operations in which the agreed date for execution is included between the contracting date and the fifth subsequent business day.

b) Simple forward sales

Simple forward sales operations shall be considered those operations in which the agreed date for the execution of the contract is more than five business days after the contracting date.

In any forward operation, the parties may agree that it be settled by differences on any date during the term, or even on the agreed execution date. Settlement by differences of a forward operation is understood as its execution, not through the transfer of the securities and payment of the agreed price, but through the cash payment, by the party obliged to do so, of the amount resulting from the difference between the previously agreed price and the one resulting from the bases established in the agreement.

c) Sales with repurchase agreement on a fixed date

Sales with repurchase agreement on a fixed date shall be considered those operations in which the holder of the securities sells them until the amortization date, simultaneously agreeing on the repurchase of securities of identical characteristics and for the same nominal value, on a specific and intermediate date between the sale date and the next amortization date, even if this is partial or voluntary. The purchasing party in the operations detailed in this section acquires ownership of the security subject to the operation; consequently, until the date of the commitment, it may execute, in turn, operations with repurchase agreement where the same does not exceed the date of the previous one.

d) Sales with repurchase agreement on demand

Sales with repurchase agreement on demand shall be considered those operations in which, at the time of contracting, the price and date of transmission of the initial sale are stipulated and the period during which the buyer-seller has the option to demand repurchase under the conditions that must be established in the same contracting act is fixed. These conditions shall be fixed in such a way that the internal rate of return of the temporary acquisition of the debt is the agreed one, regardless of the moment when the option is exercised. The repurchase shall be ordered with a minimum notice of one day prior to the date of transfer of the securities.

e) Simultaneous

Simultaneous operations shall be considered those in which two sales of securities of opposite direction are contracted at the same time, both carried out with securities of identical characteristics and for the same nominal amount, but with different execution dates. Both sales may be cash with different settlement dates, forward, or the first cash and the second forward.

2. Contracting date and value date

The contracting date shall be understood as that on which the parties manifest their consent on the conditions of the operation. On the contracting date, the parties will agree on the value date of the operation and will also establish the date of the repurchase commitment in operations where there is such a fixed-term agreement, or the date considered as the end of the option period in which the repurchase fulfillment must be executed, in those formalized with an on-demand agreement.

The value date shall be understood as that on which the transfer of the book-entry debt is effected under the terms defined in number one of article eight of Royal Decree 505/1987, of April 3, which creates a book entry system.

Contracted operations must be communicated to the Systems Company at the time of their contracting, and in any case following the procedure established for this purpose by the Systems Company.

3. Operations between account holders

Account holders may contract among themselves the following operations:

• Simple cash sales operations.

• Simple forward sales operations.

• Simultaneous operations.

4. Operations between account holders and those who do not maintain accounts open under their ownership in the Systems Company (hereinafter, third parties)

Account holders may contract with third parties all the operations mentioned in section 1.

In forward sales operations with book-entry public debt, either through simple forward sales operations or through simultaneous operations, which account holders can contract with third parties, the contracted nominal amount shall not be less than 100,000 euros. This operation may be covered by contracts signed by the market member and the third party participating in the contracting. In such cases, these contracts shall include clauses establishing the settlement on account of the differences that arise with respect to the reference prices fixed therein. Clauses providing for the settlement by differences of the operations on any intermediate date between the contracting date and the maturity date of the operation may also be added.

Notwithstanding the foregoing, the operations described in the previous paragraph may be carried out for an amount less than 100,000 euros, provided they are formalized in the standard contracts referred to in section c), point eight, section four, of the Order of the Ministry of Economy and Finance of October 25, 1995, which partially develops Royal Decree 629/1993, of May 3, on rules of conduct in the securities markets and mandatory registers.

All book-entry public debt, both issued and pending issuance, may be the subject of these forward operations between account holders and third parties, provided that, in the latter case, its issuance has been published in the corresponding Official Gazette and there are no more than thirty calendar days remaining for its inclusion in the Systems Company. The value date of forward operations with book-entry public debt pending issuance must be equal to or subsequent to the date of inclusion of the securities in the Systems Company.

5. Managing entities may carry out, upon joint order of the contracting parties, the corresponding entries for the following operations:

• Simple cash sales operations.

• Sales with repurchase agreement on a fixed date.

• Sales with repurchase agreement on demand.

THIRD RULE.

Segregation and Reconstitution Operations

1. Entities authorized to carry out segregation and reconstitution operations

Segregation and reconstitution operations, defined in the Order of June 19, 1997, may only be carried out by entities that have obtained authorization from the issuer of the corresponding separable public debt securities.

2. Orders for segregation and reconstitution

The reconstitution of a separable bond will require, in any case, the holding or acquisition of a nominal principal amount of the separable portion of said separable bond equivalent to the nominal amount intended to be reconstructed.

3. Characteristics of the segregated principal and segregated coupons

Segregated coupons with the same maturity date shall be fungible with each other, even if they come from different references of separable bonds. However, segregated coupons shall not be fungible with segregated principals, even if their maturity date is the same. Nor shall segregated principals be fungible with each other, unless they come from the same issuance of separable bonds.

FOURTH RULE.

Transparency and publicity in operations with third parties

1. When an entity acts offering counterparty in its own name, all conditions of the operation shall be specified and closed at the time of contracting.

In these cases, the entity is obliged to publicly quote in terms of annual equivalent rate, as determined in point 2 of rule eight of Circular 8/1990, those securities in which it is willing to operate, both in simple cash sales operations and in repurchase agreement operations, if applicable, indicating, in addition, in the latter, the terms of the operation. These quotes shall bind the entity in the manner provided in article 10 of the Ministerial Order of May 19, 1987, which develops Royal Decree 505/1987, of April 3.

In the quotes described in the previous paragraph, commissions established by entities for this type of operation shall be included, if applicable, in accordance with rule three of the aforementioned Circular 8/1990.

2. When the entity acts as an agent, the conditions of the operation shall be stipulated with the principal in terms of a reference price or interest rate, which may refer to the value date of the operation, and the commission agreed upon those.

3. Entities shall deliver to their principals a copy of the contract or document on which the order to invest in public debt is formalized, which must comply with what is provided in the Order of October 25, 1995, partially developing Royal Decree 629/1993, of May 3, on rules of conduct in the securities markets and mandatory registers.

In contracts formalizing sales with repurchase agreement operations, on a fixed date or on demand, carried out with third parties, whose effective transfer amount exceeds that resulting from applying the market price of the transferred securities, the amount corresponding to the securities, according to the market price, and the difference between this valuation and the agreed transfer value, must be specified.

4. Cash settlements must be effected on the date coinciding with the value date of the transfer of the securities, and if appropriate, compensations for fund provisions made by clients on dates prior to those must be carried out, or expenses for the banking management of the payment instruments used for settlement must be settled.

Entities may request fund provisions from the moment of acceptance of purchase orders placed by their clients.

5. The obligation of entities to make quotes public, mentioned in point 1, shall be understood as fulfilled when they are disseminated through any of the publicity means established in Circular 8/1990, as well as through available electronic quotation systems and any other that enjoys sufficient dissemination.

Entities shall also have the obligation to disseminate the latest changes registered in the market.

REPEALING RULE

1. The following circulars are repealed:

• Circular 16/1987, of May 19.

• Circular 12/1988, of September 8.

• Circular 5/1989, of February 24.

• Circular 11/1989, of June 2.

• Circular 3/1990, of March 28.

• Circular 6/1991, of November 13.

• Circular 8/1991, of November 26.

• Circular 6/1993, of March 26.

• Circular 7/1994, of September 26.

• Circular 7/1997, of November 21.

• Circular 1/1999, of January 8.

Likewise, rule four of Circular 3/2000, of May 31, is repealed.

FINAL RULE

1. This Circular shall enter into force on March 1, 2007.

2. The Bank of Spain will develop the necessary technical aspects for the applicability of this Circular through technical applications.

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