Public Sector Assets. Credit Risk Fractionation. Consideration of Net Bond Positions

"2004 - Year of the Argentine Antarctic"
CENTRAL BANK OF THE ARGENTINE REPUBLIC
COMMUNICATION "A" 4230 15/10/2004
TO FINANCIAL ENTITIES:
Ref.: Circular
CONAU 1 - 680
LISOL 1 - 430
Public Sector Assets. Credit Risk Fractionation. Consideration of Net Bond Positions.

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

"1. Establish the following accounting treatment for repo operations carried out with public securities registered according to the lower of present value or technical value criterion, whose volatility has been reported by the Central Bank of the Republic Argentina to determine the capital requirement for market risk:

"Forward purchases shall be recorded in 'Other credits for financial intermediation - Forward purchases of public securities for repo operations with holdings valued according to the lower of present value or technical value criterion'.

The difference between the registration value of the securities affected by the execution of those repo operations and their quotation value shall be reflected until the settlement of the forward purchase in 'Other credits for financial intermediation - Forward purchases of public securities for repo operations with holdings valued according to the lower of present value or technical value criterion - Valuation Difference'.

The reinstatement of the holdings shall be effected at the value admitted according to the provisions on the valuation of public sector assets, applied for their registration prior to the execution of the repo operation."

2. Substitute in Annex II to Communication "A" 2140 the point incorporated following point 3. by point 7. of Communication "A" 3911, with the following:

"... Limits of operations with the non-financial public sector.

Financing to the non-financial public sector - National, provincial, municipal governments and of the Autonomous City of Buenos Aires, including the central administration, ministries, secretariats and their decentralized and autonomous departments and other entities, regardless of their form of instrumentality - shall not exceed, at any time, the percentages indicated below, which must be applied to the computable patrimonial responsibility (RPC) of the entity on the last day of the month preceding the one in question:

i) Total of operations with the national public sector: 50% of the RPC.

Within this limit are included financing granted to governments of other jurisdictions that have the guarantee of federal tax sharing.

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ii) Total of operations with each provincial jurisdiction and with the Autonomous City of Buenos Aires that must have the guarantee of local revenue or pledge or be instrumented in the form of financial leasing ("leasing"): 10% of the RPC.

Within this limit are included financing granted to municipal governments of the respective jurisdiction that have the guarantee of provincial tax sharing, and those included in item i) are excluded.

iii) Total of operations with each municipal jurisdiction that must have the guarantee of local revenue or pledge or be instrumented in the form of financial leasing ("leasing"): 3% of the RPC.

The total of financing granted to the aforementioned jurisdictions shall not exceed 15% of the RPC. For the purpose of the calculation, financing included in item ii) shall be excluded.

iv) The total of operations included (items i) to iii)): 75% of the RPC.

In order to determine the amount of financing included, with respect to national public securities subject to minimum capital requirement for market risk - that is, with volatility reported by the Central Bank - the following criterion shall be observed:

a) They shall be considered in terms of net position, taking into account for this purpose holdings (+), purchases (+) and sales (-) for spot settlement and forward (linked or not to repos), loans (+) and deposits (-).

Spot sales for settlement and forward (linked or not to repos) and deposits may only be imputed against assets that are registered at market value. Therefore, any excess cannot affect the position of securities valued according to other criteria.

b) The balances registered in the accounts "Other credits for financial intermediation - Forward purchases of public securities for repo operations with holdings in investment accounts - Valuation Difference" and "Other credits for financial intermediation - Forward purchases of public securities for repo operations with holdings valued according to the lower of present value or technical value criterion - Valuation Difference" shall be added.

c) Spot sales for settlement and forward (not linked to repos) that are entered into with banks abroad that are the parent or controlling house and their subsidiaries and branches, or controlled or branches of the local entity nor with other natural or legal persons linked, shall not be computed.

d) New operations may be carried out with these securities provided that when computing the daily net position referred to in item a) the specific credit limits established are not exceeded nor, in case, the admitted excesses are increased."

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We send you attached the update of the regime for the Valuation of Guaranteed Loans issued by the National Government and other debt instruments of the non-financial public sector (annex to Communication "A" 4180).

We greet you very respectfully.

CENTRAL BANK OF THE ARGENTINE REPUBLIC
Alfredo A. Besio
Manager of Emission of Standards

José Rutman
Principal Manager of Standards

ANNEX

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, 4155, 4163, 4180, 4230 and "B" 7782 and 8131)
Annex to
Com. "A"
4230
-1-

1. Establish that the following assets that entities maintain in their 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, by the "Reference Stabilization Coefficient" plus accrued interest according to contractual conditions-, the lower of both:

a) "Guaranteed Loans" issued by the National Government under Decree 1387/01.

b) Public securities that have not been subject to minimum capital requirement for market risk for not meeting the established requirements, usual quotation in markets for relevant transactions, etc. -except instruments detailed in item v)-.

Holdings of new issuances of national public securities are also included, as long as their volatility is not reported.

c) Promissory notes issued by the Fiduciary Fund for Provincial Development under 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 under Decree 1579/02, Resolution 539/02 of the Ministry of Economy and complementary norms. The use of this valuation method is optional -in place of market value- and cannot be used for incorporations not linked to the aforementioned provisions.

The aforementioned choice may be modified subsequently by the "market value" criterion, which, once used, must encompass the entire portfolio and has the character of a definitive option.

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 present value being optional according to what was established above. The exercise of that option has definitive character.

Assets delivered as guarantee for advances granted by the Central Bank of the Republic Argentina 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 the aforementioned decree, in which case they will be registered by the value admitted for the purposes of the constitution of the guarantees updated, if applicable, by the "Reference Stabilization Coefficient".

Consequently, that valuation criterion is not applicable in the following cases:

i) Securities that entities have accounted for in investment accounts and kept the corresponding capital requirement.

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, 4155, 4163, 4180, 4230 and "B" 7782 and 8131)
Annex to
Com. "A"
4230
-2-

ii) Compensation bonds received according to 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) Securities that must be valued according to their market quotation.

iv) Bills and other securities issued by the Central Bank of the Republic Argentina.

v) External Bills of the Argentine Republic in US dollars "Encuesta + 4.95% 2001-2004" and "Badlar + 2.98% 2001-2004", "Tax Credit Option Certificates", "Fiscal Credit Certificates", including coupons issued under Decree 979/01, and other non-financial public sector instruments that are overdue and unpaid. All these instruments, from January 2004, shall be registered at the accounting value as of 31.12.03 or by the amount obtained -if this is lower- by applying 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 resulting from the net present value method with respect to the assets covered by that criterion -currently, items c) and d) of this point.-

For the purposes of determining the accounting value as of 31.12.03 and the nominal value -corresponding to capital- on that date, accrued interest since December 2001 shall not be included.

In the case of securities originally issued in foreign currency that have been converted to pesos, for such purposes the nominal value re-expressed in national currency shall be considered, updating both amounts -accounting and nominal- by the "Reference Stabilization Coefficient" if its application was foreseen.

2. Establish that for the purposes of determining the present value of the portfolio included in point 1., from the March 2003 balances onwards, 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"-, shall be discounted at the interest rates established in the following schedule:

Period Annual nominal rate
March - December/03 3.00 %
January - June/04 3.25 %
July/04 3.29 %
August/04 3.33 %
September/04 3.37 %
October/04 3.41 %
November/04 3.46 %
December/04 3.50 %
January/05 3.54 %
February/05 3.58 %

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, 4155, 4163, 4180, 4230 and "B" 7782 and 8131)
Annex to
Com. "A"
4230
-3-

Period Annual nominal rate
March/05 3.62 %
April/05 3.66 %
May/05 3.71 %
June/05 3.75 %
July/05 3.79 %
August/05 3.83 %
September/05 3.87 %
October/05 3.91 %
November/05 3.96 %
December/05 4.00 %
January/06 4.08 %
February/06 4.15 %
March/06 4.23 %
April/06 4.31 %
May/06 4.39 %
June/06 4.47 %
July/06 4.56 %
August/06 4.64 %
September/06 4.73 %
October/06 4.82 %
November/06 4.91 %
December/06 5.00 %
January/07 5% + 0.04*(TM-5%)
February/07 5% + 0.08*(TM-5%)
March/07 5% + 0.13*(TM-5%)
April/07 5% + 0.17*(TM-5%)
May/07 5% + 0.21*(TM-5%)
June/07 5% + 0.25*(TM-5%)
July/07 5% + 0.29*(TM-5%)
August/07 5% + 0.33*(TM-5%)
September/07 5% + 0.38*(TM-5%)
October/07 5% + 0.42*(TM-5%)
November/07 5% + 0.46*(TM-5%)
December/07 5% + 0.50*(TM-5%)
January/08 5% + 0.58*(TM-5%)
February/08 5% + 0.66*(TM-5%)
March/08 5% + 0.75*(TM-5%)
April/08 5% + 0.83*(TM-5%)
May/08 5% + 0.92*(TM-5%)
From June/08 TM

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, 4155, 4163, 4180, 4230 and "B" 7782 and 8131)
Annex to
Com. "A"
4230
-4-

where:
TM: average market rate -expressed in percentage- that this Institution will report determined based on internal rates of return arising from quotations in the market of national public securities of similar average maturity ("modified duration"), grouped in tranches (zones) according to that maturity.

For the calculation of the present value, the number of calendar days from each month-end to the maturity of each amortization and/or interest service shall be considered.

The interest rate assigned for each period of the preceding schedule shall be the only one to be used to calculate the present value of the entire cash flow of the assets included, in case, in each of the months of the corresponding periods, regardless of the dates on which the pertinent services and/or payments mature.

In the case of instruments denominated in pesos that do not contemplate update clauses, for the purposes of calculating the present value, the implicit inflation rate used to adjust the flows of assets and liabilities updateable by CER in the determination of the minimum capital requirement for interest rate risk shall be added -as a multiplicative factor- to the nominal rates provided for each period.

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, shall be reflected in an asset regularization account that will be enabled for this purpose, to the extent that the final result is positive. If the result is negative, it shall be imputed to results.

Monthly, the balance yielded by that account shall be adjusted based on the amount determined by performing the calculation of the sum of the differences between said concepts until exhausted.

If there is an unapplied remainder, it shall be imputed to results.

Once that balance is exhausted, the differences -positive or negative- that are subsequently registered by the valuation according to the "present value" criterion shall be imputed directly to results.

When amortizations of the instruments occur, if there is a balance in the regularization account, it shall be adjusted with a counterpart in results up to the amount obtained by applying the proportion represented by the amortization, calculated on the nominal value, to the difference between the accounting value (present value 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 shall be imputed to results.

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, 4155, 4163, 4180, 4230 and "B" 7782 and 8131)
Annex to
Com. "A"
4230
-5-

In the cases of incorporation of assets included after 28.2.03, without prejudice to the observance of the regulations resulting applicable for it, the registration of the differences originating from the application of the procedure referred to in this point shall be made in a specific regularization account, distinct from that 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 shall be the result of applying the guidelines detailed below:

a) Holding as of 28.2.03:

i) Guaranteed Loans issued under Decree 1387/01:

The balance registered as of 28.2.03 in the accounting -capitals- for each instrument net of the asset regularization account according to point 4. of Communication "A" 3366 (accounts 131140 and 131193, respectively), shall 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- shall be updated by the "Reference Stabilization Coefficient" adding the corresponding accrued interest according to contractual conditions, to establish the respective theoretical value.

As a consequence of the new valuation procedure, in March 2003 the balance registered in that regularization account (code 131193) must be reversed.

ii) Promissory notes or Bonds (according to option) issued by the Fiduciary Fund for Provincial Development under Decree 1579/02, Resolution 539/02 of the Ministry of Economy and complementary norms.

The amount at which the respective instruments that were delivered in exchange were registered as of 28.2.03 shall be initially considered, updated, if applicable, by the "Reference Stabilization Coefficient" at the end of each month, considering the proportion of the amortizations that would have corresponded and adding the corresponding accrued interest according to the issuance conditions.

iii) Others.

If applicable, it shall be updated by the application of the "Reference Stabilization Coefficient", considering any amortizations and adding the corresponding accrued interest according to the issuance or contractual conditions.

b) Incorporations after 28.2.03:

The incorporation value in the asset shall be considered, which, if applicable, shall be updated by the "Reference Stabilization Coefficient", considering any amortizations and adding the corresponding accrued interest according to the issuance or contractual conditions.

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, 4155, 4163, 4180, 4230 and "B" 7782 and 8131)
Annex to
Com. "A"
4230
-6-

5. Dispose that the debt instruments that financial entities receive under the Mortgage Refinancing System -Law 25.798-, shall be registered at their present value according to the guidelines established in point 2., not exceeding the technical value.

Initially, the difference between the present value and the corresponding nominal value shall be imputed against the regularization account enabled for these instruments. Subsequently, the valuation differences arising each month by the application of the present value method shall also be imputed against the regularization account or, in its defect, once the balance is exhausted, directly to results.

From the moment that the bonds received for the overdue and unpaid installments have normal and usual quotation -that is, when the Central Bank communicates their volatility for the purposes of determining the minimum capital requirement for market risk-, they shall be valued according to their market value, and the balance of the regularization account shall be derecognized with a counterpart in results, in the proportion they represent with respect to the total nominal value received for that concept -60%, 40% or 100%, depending on whether it is the bond with maturity of 2.5 years, 10 years or both, respectively.-

6. Establish the following accounting treatment for repo operations carried out with public securities registered according to the lower of present value or technical value criterion, whose volatility has been reported by the Central Bank of the Republic Argentina to determine the capital requirement for market risk.

Forward purchases shall be recorded in "Other credits for financial intermediation - Forward purchases of public securities for repo operations with holdings valued according to the lower of present value or technical value criterion".

The difference between the registration value of the securities affected by the execution of those repo operations and their quotation value shall be reflected until the settlement of the forward purchase in "Other credits for financial intermediation - Forward purchases of public securities for repo operations with holdings valued according to the lower of present value or technical value criterion - Valuation Difference".

The reinstatement of the holdings shall be effected at the value admitted according to the provisions on the valuation of public sector assets, applied for their registration prior to the execution of the repo operation.