Circular A 4114: Compensation for Financial Entities CER/CVS under Laws 25.713 and 25.796 and Decree 117/04 — BCRA — AR

"2004 - Year of the Argentine Antarctic"
BANCO CENTRAL DE LA REPUBLICA ARGENTINA
COMMUNICATION "A" 4114 12/03/2004
TO FINANCIAL ENTITIES:
Ref.: Circular
LISOL 1 - 412
Laws 25.713 and 25.796 and Decree 117/04.
Compensation for financial entities
CER/CVS.

We address you to inform you that this Institution has adopted the following resolution:

"1. Establish that in order to participate in the compensation regime provided for in Chapter II of Law 25.796 and Decree 117/04 (Annex II) and given the optional nature of this compensation, entities must declare their adherence by 30.4.04 through a note signed by their legal representative according to the model incorporated as an annex. Failure to submit the adherence note in these terms will result in the entity being considered to have withdrawn from the aforementioned compensation, without any right to subsequent claim.

To this effect, the following elements shall be taken into account:
a) Based on the financial statements as of 31.1.02, the balances of capital and interest of the portfolios subject to the application of the Salary Variation Coefficient "CVS" -points 2.4. and 7.1. of the Annex to Communication "A" 4103- by credit line, plus the accrued interest -according to contractual rates- from 31.1.02 to 2.2.02, inclusive, with the deduction of the following concepts, in the order indicated and on the remainder obtained after each of them:

The cancellations made on 1.2.02.
The provisions for uncollectible risk arising from applying the percentages assigned by the entity -not lower than the minimum guidelines- according to the debtor classification reported for the balance sheet and the debtor status report as of 31.12.01, including in case the application of the total provisioning of the accrued interest based on the customer category. It will not be necessary to take into account the global provision for the normal portfolio.
The recoverability factor of 5% -subsection b) of article 4° of Law 25.796-.

The portfolio will be disaggregated into:

Mortgage credit line: point 2.4. and subsection a) of point 7.1. of the Annex to Comm. "A" 4103.
Pledge credit line: subsection c) of point 7.1. of the Annex to Comm. "A" 4103.
Personal credit line: subsection b) of point 7.1. of the Annex to Comm. "A" 4103.

b) The percentage desired to be incorporated into this regime, which will be applied to the balances of the credit portfolios included, determined in subsection a). A single percentage will be used for all lines. c) The weighted average as of 3.2.02 of the rates applied in each of the credit lines (mortgage, pledge, and personal) for which it will be considered, with respect to each credit, the balance defined according to the preceding subsection a) -before deducting the recoverability factor- and the contractual rates in force as of 3.2.02 or the average referred to in Communication "B" 7541, according to the type of credit, whichever is lower, and the total credits for each line. d) The weighted average life as of 3.2.02 of the credit portfolio -disaggregated by line-, for which it will be considered first the average life of each credit, taking into account the amount owed as defined in subsection a) before deducting the recoverability factor, the remaining term, the payment system and periodicity, and the contractual interest rate in force on that date, and then the results obtained will be weighted based on the amount owed of each credit. e) Credit portfolio that is included in points 2.4. and 7.1. of the Annex to Communication "A" 4103 originated by financial entities and ceded to trusts until 31.1.02 when, on that date, they had been holders of participation certificates issued by those trusts. In these cases, that credit portfolio must be taken into account according to the guidelines established in the preceding subsections a), c) and d) and the percentage that the holdings of the titles represented with respect to the assets of the trusts, according to the calculation carried out after the application of the provisions on conversion to pesos referred to in Law 25.561 and Decree 214/02. The percentage of adherence to the regime according to subsection b) will also apply.

Likewise, said procedure will be applicable by the holdings of debt titles of financial trusts that register until 31.1.02, in cases where the trustee has issued only this type of instrument, with respect to the ceded assets.
To this end, the respective trustees must provide the aforementioned elements, which must have the opinion of the external auditor who rules on the trusts, regarding their validity and methodology applied, with the scope that is established.

Entities must attach a special report from external audit on the correct application of the methodology and validity of the data referred to in the preceding subsections a), c), d) and e), with the scope that is established.

The settlements to be made under this regime through "Bonds of the National Government in pesos at variable rate 2013" in accordance with articles 8º, 9º, 10 and 11 of Annex II to Decree 117/04 will only proceed in cases where financial entities have constituted the guarantees provided for in the second paragraph of article 10 and complied with what is established in article 13 of said annex -except in cases where what is contemplated in section II of article 35 bis of the Law of Financial Entities is verified or that the entity is suspended in the terms of article 49 of the Organic Charter of this Institution-.

Generally, that is, with scope for all participating entities, the compensation mechanism will apply as long as the hypothesis provided for in the first paragraph of article 4º of Annex II to Decree 117/04 is not realized, considering each credit line separately in the system as a whole. Individually, the procedure may conclude earlier -always by each line- when the term of the "theoretical loan" ends.

Establish that for the purpose of requiring the effective availability of the "Bonds of the National Government in pesos at variable rate 2013", once the obligation of eventual restitution has ceased, entities must take into account the amounts of new financings granted to the non-financial private sector from 3.2.02 and of refinancings of existing credits on that date from which results an improvement of the agreed conditions in terms of amounts, term and interest rate -article 13 of Annex II to Decree 117/04-, including those granted in accordance with the regime provided for in the Annex to Communication "A" 4103, point 2., with disaggregation of the operations whose agreed maturity date exceeds that of the aforementioned titles.
Substitute point 3.6. of the norms on "Holdings of securities in investment accounts" with the following:
"3.6. Treatment of National Government bonds received by financial entities -articles 28 and 29 of Decree 905/02 and Chapter II of Law 25.796 (Annex II to Decree 117/04)-.
The National Government bonds that financial entities receive, within the framework of what is provided in Chapter VI, articles 28 and 29 of Decree 905/02 -"National Government Bonds in pesos 2% 2007" and/or "National Government Bonds in US dollars Libor 2012"- and in Chapter II of Law 25.796 (Annex II to Decree 117/04) -"National Government Bonds in pesos at variable rate 2013"-, may be registered at their technical value. While this procedure is employed, cash dividends cannot be distributed, except for the amount of profits that exceeds the difference between the registration value and the quotation of the aforementioned bonds, after the legal and statutory appropriations have been made. To this end, the weighted average of the quotations of the bonds according to the transactions registered in the self-regulated markets during the month of the closing of the fiscal year will be considered. In these cases, point 3.2. regarding the treatment of valuation differences does not apply."
Substitute subsection ii) of the fourth paragraph of point 1. of Communication "A" 3911 -text according to Communication "A" 4084- with the following:
"ii) Compensation bonds received in accordance with what is established in articles 28 and 29 of Decree 905/02 and in Chapter II of Law 25.796 (Annex II to Decree 117/04) that can be maintained at technical value (point 3.6. of Section 3. of the norms on "Holdings of securities in investment accounts")."
Clarify that the "National Government Bonds in pesos at variable rate 2013" that entities receive for the compensation referred to in Chapter II of Law 25.796 (Annex II to Decree 117/04) will not constitute defaults for the purposes of the provisions on credit risk fragmentation in accordance with what is established in the first paragraph of point 8. of the resolution disseminated by Communication "A" 3911."

We salute you very respectfully.
BANCO CENTRAL DE LA REPUBLICA ARGENTINA
Alfredo A. Besio José Rutman
Manager of Issuance
Manager of Norms
Principal Manager of Norms

ANNEX

B.C.R.A. MODEL OF ADHERENCE NOTE TO BE SIGNED BY THE LEGAL REPRESENTATIVE OF THE FINANCIAL ENTITY.
Annex to
Comm. "A"
4114
To the Central Bank of the Argentine Republic
In my capacity as (president, attorney, etc.) ...... of (name of the financial entity) ...... I hereby declare the unconditional and irrevocable adherence of this entity to the compensation regime established by Chapter II of Law 25.796, Annex II of Decree 117/04 and its complementary norms, to which it is requested to incorporate the ...... percent of the credits detailed in the informational regime provided for this purpose. In view of the above, I record that I expressly agree to the compensation regime arising from the aforementioned provisions, as well as to what is established by article 6º of Law 25.561, Law 25.713, Decree 762/02 and the other norms issued by the National Executive Power and the Central Bank of the Argentine Republic in order to regulate and complement them. As a consequence of the above, the result of the compensation mechanism established by Chapter II of Law 25.796 and Annex II to Decree 117/04 and its complementary norms is accepted unconditionally and irrevocably as the total, unique and definitive compensation for the effects generated by them, and the unconditional and irrevocable renunciation of any action or right that might be understood to belong to this entity to make other claims derived from them is made in the same unconditional and irrevocable manner. Signature:
Clarification:

HOLDINGS OF SECURITIES IN INVESTMENT ACCOUNTS
B.C.R.A.
Section 3. Valuation.
Version: 3rd COMMUNICATION "A" 4114
Validity:
12/03/2004
The swap operations that are carried out with holdings of other securities of the country will be registered in the accounts that are established at the appropriate time.
3.4. Exposure in financial statements.
The valuation criterion employed with respect to holdings in investment accounts and the quantification of the difference in relation to their valuation at market prices will be exposed in a note to the quarterly and annual financial statements.
3.5. Other aspects.
3.6.
In aspects not expressly contemplated (premiums, usable quotations, etc.), the criteria in force with general character will be applied subsidiarily.
Treatment of National Government bonds received by financial entities -articles 28 and 29 of Decree 905/02 and Chapter II of Law 25.796 (Annex II to Decree 117/04)-.
The National Government bonds that financial entities receive, within the framework of what is provided in Chapter VI, articles 28 and 29 of Decree 905/02 -"National Government Bonds in pesos 2% 2007" and/or "National Government Bonds in US dollars Libor 2012"- and in Chapter II of Law 25.796 (Annex II to Decree 117/04) -"National Government Bonds in pesos at variable rate 2013"-, may be registered at their technical value. While this procedure is employed, cash dividends cannot be distributed, except for the amount of profits that exceeds the difference between the registration value and the quotation of the aforementioned bonds, after the legal and statutory appropriations have been made. To this end, the weighted average of the quotations of the bonds according to the transactions registered in the self-regulated markets during the month of the closing of the fiscal year will be considered. In these cases, point 3.2. regarding the treatment of valuation differences does not apply.

B.C.R.A.
ORIGIN OF THE PROVISIONS INCLUDED IN THE ORDERED TEXT OF THE NORMS ON "HOLDINGS OF SECURITIES IN INVESTMENT ACCOUNTS" ORDERED TEXT SOURCE NORM
Section Point Paragraph Comm. Annex Point Paragraph Observations
1. "A" 2793 unique 1. According to Comm. "A" 3039,
"A" 3857 and "A" 4084
2. "A" 2793 unique 2. According to Comm. "A" 3039
3.1. 1st "A" 3039 According to Comm. "A" 3278
2nd "A" 2793 unique 4. 2nd
3.2. "A" 3039
3.3. "A" 3039 According to Comm. "A" 3083
3.4. "A" 2793 unique 4. 3rd
3.5. "A" 2793 unique 4. 4th According to Comm. "A" 3039
3.
3.6. "A" 3785 According to Comm. "A" 4114
4. "A" 2965 According to Comm. "A" 3083
5. 5.1. and 5.2. "A" 2793 unique 3.

Establish that the following assets that entities maintain in portfolio or incorporate in the future shall be registered at their present value according to the guidelines established in point 2. of this resolution or at their "technical value" -amount, updated if applicable, for the "Reference Stabilization Coefficient" plus the accrued interest according to contractual conditions-, whichever is lower:
a) "Guaranteed Loans" issued by the National Government within the framework of Decree 1387/01. b) Public titles that have not been subject to minimum capital requirement for market risk for not meeting the established requirements, usual quotation in the markets for relevant transactions, etc. -except the instruments detailed in subsection v)-. c) Promissory notes issued by the Fiduciary Fund for Provincial Development within the framework of Decree 1579/02, Resolution 539/02 of the Ministry of Economy and complementary norms and other loans to the non-financial public sector. d) "Guaranteed Bonds" issued by the Fiduciary Fund for Provincial Development received within the framework of Decree 1579/02, Resolution 539/02 of the Ministry of Economy and complementary norms. The use of this valuation method will be optional -in replacement of market value- and cannot be used for incorporations not linked to the provisions cited above. This choice may be modified subsequently by the "market value" criterion, which, once used, must encompass the entire portfolio and will have the character of a definitive option. The promissory notes that financial entities have received or receive in exchange for compensation bonds according to the option contained in article 28 of Decree 905/02, may be maintained at their "technical value", the application of the present value being optional according to what is established above. The exercise of that option will have definitive character. The assets delivered as guarantee of advances granted by the Central Bank of the Argentine Republic for the subscription of the bonds provided for in articles 10, 11 and 12 of Decree 905/02, ratified by article 71 of Law 25.827, may be excluded from the preceding treatment, at the definitive option of the entities -in part or in total of the advances- given the provisions of article 17 of said decree, in which case they will be registered by the value admitted for the purposes of the constitution of the guarantees. Consequently, that valuation criterion is not applicable in the following cases:
i) Titles that entities have accounted for in investment accounts and kept the corresponding capital requirement. ii) Compensation bonds received in accordance with what is established in articles 28 and 29 of Decree 905/02 and in Chapter II of Law 25.796 (Annex II to Decree 117/04) that can be maintained at technical value (point 3.6. of Section 3. of the norms on "Holdings of securities in investment accounts"). iii) Titles that must be valued according to their quotation in the market.

B.C.R.A.
Valuation of Guaranteed Loans issued by the National Government and other debt instruments of the non-financial public sector.
(Text updated according to Communications "A" 3911, 4084, 4114 and "B" 7782)
Annex to
Comm. "A"
4114 iv) Letters and other titles issued by the Central Bank of the Argentine Republic. v) External Letters of the Argentine Republic in US dollars "Encuesta + 4.95% 2001-2004" and "Badlar + 2.98% 2001-2004", "Credit Tax Option Certificates", "Fiscal Credit Certificates", including the coupons issued within the framework of Decree 979/01, and other instruments of the non-financial public sector that are overdue and unpaid. All these instruments, from January 2004, will be registered at the accounting value as of 31.12.03 or by the amount that is obtained -if this is lower- by the application to the nominal value corresponding to that date, in case net of write-offs or of the proportional part of transformation into tax options that could be exercised subsequently, of the lower percentage that results by the net present value method with respect to the assets reached by that criterion -currently, subsections c) and d) of this point-.
2. Establish that for the purposes of determining the present value of the portfolio included in
point 1., from the balances of March 2003, the cash flows (amortization and interest) of the aforementioned instruments, according to the contractual conditions fixed in each case -contemplating, if applicable, the accumulated accrual at the end of each month by the application of the "Reference Stabilization Coefficient"-, will be discounted at the interest rates established in the following schedule:

Period
Rate
Annual Nominal
March - December/03 3.00 %
January - June/04 3.25 %
July - December/04 3.50 %
January - June/05 4.00 %
July - December/05 4.50 %
January- December/06 5.00 %
January- December/07 5% + 0.5 (TM - 5 %)
From January 2008 TM

where:
TM: average market rate -expressed in percentage- that will be reported by this Institution determined based on the internal rates of return arising from the quotations in the market of national public titles of similar average life ("modified duration"), grouped in tranches (zones) according to that term. For the purposes of calculating the present value, the number of calendar days from each month-end to the maturity of each amortization and/or interest service will be considered. The interest rate assigned for each tranche of the preceding schedule will be the only one that must be employed to calculate the present value of the totality of the cash flow of the assets included, in each of the months of the corresponding periods, regardless of the dates on which the pertinent services and/or payments operate.

B.C.R.A.
Valuation of Guaranteed Loans issued by the National Government and other debt instruments of the non-financial public sector.
(Text updated according to Communications "A" 3911, 4084, 4114 and "B" 7782)
Annex to
Comm. "A"
4114
3. Establish that the sum of the differences between the present value determined for March 2003 -or subsequent periods- for each instrument included, according to the preceding points or the technical value -the lower- and the respective "theoretical values" as defined in point 4. of this resolution, will be reflected in an asset regularizing account that will be enabled for this purpose, to the extent that the final result is positive. If the result is negative, it will be imputed to results.
Monthly, the balance yielded by that account will be adjusted based on the amount determined by carrying out the calculation of the sum of the differences between said concepts until exhausting it.
If there is an unapplied remainder, it will be imputed to results.
Once said balance is exhausted, the differences -positive or negative- that are subsequently registered by the valuation according to the "present value" criterion will be imputed directly to results.
When amortizations of the instruments occur, if there is a balance in the regularizing account, it will be adjusted with a counterpart in results up to the amount obtained by applying the proportion that the amortization represents, calculated on the nominal value, to the difference between the book value (present or technical value, the lower) and the theoretical value of the instrument. The updates by the Reference Stabilization Coefficient "CER" that, if applicable, are applied to the theoretical values and the accrued interest according to the issuance or contractual conditions of the instruments will be imputed to results. In the cases of incorporations of included assets subsequent to 28.2.03, without prejudice to the observance of the norms that result applicable for this, the registration of the differences originating from the application of the procedure referred to in this point will be made in a specific regularizing account, distinct from the one used to reflect the effects of the calculations regarding the holdings as of 28.2.03.
4. Establish that the "theoretical value" of the instruments that will be considered for these purposes will be the result of applying the guidelines detailed below:
a) Holding as of 28.2.03:
i) Guaranteed Loans issued within the framework of Decree 1387/01:
The balance registered as of 28.2.03 in the accounting -capitals- for each instrument net of the asset regularizing account according to point 4. of Communication "A" 3366 (accounts 131140 and 131193, respectively) will be considered.
At the end of each month, if applicable, the amount of the theoretical value -net of the proportion of amortizations that would have corresponded- will be updated by the "Reference Stabilization Coefficient" adding the accrued interest corresponding according to the contractual conditions, to establish the respective theoretical value. As a consequence of the new valuation procedure, in March 2003 the balance registered in that regularizing account (code 131193) must be reversed.

B.C.R.A.
Valuation of Secured Loans Issued by the National Government and Other Debt Instruments of the Non-Financial Public Sector.
(Text updated according to Communications “A” 3911, 4084, 4114 and “B” 7782)
Annex to
Comm. “A”
4114 ii) Promissory Notes or Bonds (as per option) issued by the Fiduciary Fund for Provincial Development within the framework of Decree 1579/02, Resolution 539/02 of the Ministry of Economy and complementary regulations.
The amount at which the respective instruments delivered in exchange were registered on 28.2.03 will be considered initially, updated, if applicable, by the “Reference Stabilization Coefficient” at the end of each month, considering the proportion of amortizations that would have corresponded and adding the corresponding accrued interest in accordance with the issuance conditions. iii) Others. If applicable, it will be updated by applying the “Reference Stabilization Coefficient”, considering any eventual amortizations and adding the corresponding accrued interest according to the issuance or contractual conditions. b) Subsequent incorporations after 28.2.03:
The value of incorporation into the asset will be considered, which, if applicable, will be updated by the “Reference Stabilization Coefficient”, considering any eventual amortizations and adding the corresponding accrued interest in accordance with the issuance or contractual conditions.