Regulation on Investments for the Pension Savings System

DE No. 21/1998
DECRETO No. 21/1998
REGLAMENTO DE INVERSIONES PARA EL SISTEMA DE AHORRO PARA PENSIONES Aprobación: 18/02/1998 Vigencia: 07/03/1998

DECRETO N° 21

THE PRESIDENT OF THE REPUBLIC OF EL SALVADOR

CONSIDERING:

I. That in accordance with the Organic Law of the Superintendence of Pensions, it is the responsibility of the Superintendence to audit, monitor, and control compliance with the legal provisions applicable to the operation of the Pension Savings System.

II. That in accordance with Art. 5 of the Organic Law of the Superintendence of Pensions and Art. 88 of the Law of the Pension Savings System, it is the responsibility of the Superintendence of Pensions to audit the investments that Pension Fund Administrators make with resources from Pension Funds, with the objective that such investments obtain adequate profitability under conditions of security, liquidity, and risk diversification.

III. That Art. 79 of the Law of the Pension Savings System regulates that the value of the share unit of Pension Funds will be determined daily based on the economic value or market value of the investments in accordance with the aforementioned article.

IV. That in accordance with the Law of the Pension Savings System, the method for valuing financial instruments will be determined by the Superintendence of Pensions, which will be applicable to all Pension Funds under the methodology and periodicity specified for this purpose.

THEREFORE,

In exercise of its constitutional powers,

DECREEs the following

REGULATION ON INVESTMENTS FOR THE PENSION SAVINGS SYSTEM

TITLE I
ON THE VALUATION OF INVESTMENTS OF PENSION FUNDS

CHAPTER I
GENERAL PROVISIONS

Art. 1.- This Regulation aims to define the criteria and guidelines that will be applied to perform the valuation of investments made with resources from Pension Funds by Pension Fund Administrating Institutions, in order for them to obtain adequate profitability under conditions of security, liquidity, and risk diversification, in accordance with what is established in Art. 88 of the Law of the Pension Savings System, and to establish specific guidelines for the calculation of the share unit value and number of shares of each type of Pension Fund administered by these institutions.

Likewise, this Regulation develops the methodology to determine cases where transactions of instruments have been carried out at prices far from those recorded in the primary and secondary markets that harm the value of the Fund, as referred to in Article 102 of the Law of the Pension Savings System. (4)

Art. 2.- Each Pension Fund Administrating Institution may administer up to a maximum of four Pension Funds. (4)

Art. 3.- In the text of this Regulation, the following designations will be used: (4) a) AFP: Pension Fund Administrating Institution. b) Central Bank: Central Reserve Bank of El Salvador. (4) c) BANDESAL: Development Bank of El Salvador. (4) d) Stock Exchange: A Salvadoran stock exchange. (4) e) Share Unit: Accounting unit in which a Pension Fund is expressed. (4) f) DGT: General Treasury Directorate. g) Fund: Pension Fund, refers to the different types of Funds mentioned in Article 23-A of the Law of the Pension Savings System. (4) h) FSV: Social Housing Fund. i) Instrument or Security: Financial Instrument. (4) j) SAP Law: Law of the Pension Savings System. (4) k) Primary Market: That in which issuers and buyers participate directly or through brokerage houses, in the purchase and sale of securities offered to the public for the first time, in accordance with the Securities Market Law. (4) l) Secondary Market: That in which securities are traded for the second or more times. In it, issuers are no longer the offerors of said securities, in accordance with the Securities Market Law. (4) m) Equity of Pension Funds: Composed of the set of Individual Savings Accounts for Pensions, the Profitability Fluctuation Reserve, the Solidarity Guarantee Account, Transfer Certificates that have become effective, and the returns on their investments, minus the commissions of the Pension Fund Administrating Institution, as appropriate. (4) n) SAP: Pension Savings System. o) SPP: Public Pension System. p) Superintendence: Superintendence of the Financial System. (4) q) IRR: Internal Rate of Return.

r) Relevant IRR: Family IRR. (4) s) Previsional Titles: By type of securities that include Transfer Certificates, Supplementary Transfer Certificates, and Previsional Investment Certificates. (4) t) Share Unit Value: Value in United States dollars of the share unit of a Pension Fund. (4)

Art. 4.- For the purposes of this Regulation, the concepts of securities, primary and secondary market, serial securities, business group, and affiliated companies, among others, will be subject to what is defined in the Securities Market Law.

Likewise, financial instruments included in the term "securities" referred to in the preceding paragraph will be considered.

Art. 5.- The Pension Fund constitutes the set of individual savings accounts for pensions, the Profitability Fluctuation Reserve, the Solidarity Guarantee Account, Transfer Certificates that have become effective, and the returns on their investments, minus the commissions of the Pension Fund Administrating Institution.

Art. 6.- REPEALED. (4)

Art. 7.- REPEALED. (4)

Art. 8.- REPEALED. (4)

Art. 9.- REPEALED. (4)

Art. 10.- The directors of an AFP, its managers, administrators, and in general, any person who by reason of their position or role has access to privileged information regarding the operations, policies, and investment strategies of Pension Funds must maintain absolute confidentiality regarding these topics until such information becomes public.

Likewise, it is prohibited for the persons mentioned in the preceding paragraph to use reserved information directly or indirectly to obtain for themselves or for others, other than the Pension Fund, advantages through the purchase or sale of securities. All of the foregoing without prejudice to the administrative, civil, and penal actions that may arise.

Art. 11.- REPEALED. (4)

Art. 12.- REPEALED. (4)

Art. 13.- REPEALED. (4)

Art. 14.- REPEALED. (4)

Art. 15.- REPEALED. (4)

Art. 16.- REPEALED. (4)

CHAPTER II REPEALED (4)
ON INVESTMENT LIMITS REPEALED (4)

Art. 17.- REPEALED. (4)

Art. 18.- REPEALED. (4)

Art. 19.- REPEALED. (4)

Art. 20.- REPEALED. (4)

Art. 21.- REPEALED. (4)

Art. 22.- REPEALED. (4)

CHAPTER III REPEALED (4)
ON INFORMATION TO THE SUPERINTENDENCE REPEALED (4)

Art. 23.- REPEALED. (4)

TITLE II
ON INVESTMENTS AND THEIR VALUATION

CHAPTER I
ON GENERAL CONCEPTS OF VALUATION

Art. 24.- For the purposes of valuing Pension Funds, the Superintendence will determine and provide to each AFP the economic or market value of each of the securities in which the funds of the Pension Fund are invested.

For fixed income instruments, including instruments issued at adjustable interest rates, the price will be expressed at the present value of a nominal monetary unit. For variable income instruments, the Superintendence will provide the unit price at which said instruments will be valued. The aforementioned values will be calculated, according to the methodology indicated in this Title. The periodicity of delivery of valuation prices to the AFPs will be that established in the respective instruction.

The exchange rate to be used to value investments in foreign currency will be that published by the Central Reserve Bank of El Salvador. (4)

Art. 24-A.- The economic or market value of each of the securities in which the resources of the Pension Funds are invested will be provided even for non-business days. For this purpose, the valuation prices of non-business days will be provided on the next business day. (4)

The periodicity of delivery of valuation prices to the AFPs will be daily, on the next business day; however, when interest rate adjustments or other calculations necessary for the valuation of investments are made, within a maximum of three business days, except in case of fortuitous event or force majeure. (4)

Change of family

Art. 24-B.- When an instrument changes family and there are no registered transactions in the market, it will be valued with the Family IRR to which it was transferred. (4)

Use of decimals

Art. 24-C.- For the calculation of all operations and the electronic transmission of required information, it will be carried out with seventeen decimals. (4)

Art. 25.- For the calculation of the price of instruments, only valid transactions will be taken. (4)

All transactions of fixed and variable income instruments carried out in the primary market will be considered valid. (4)

Additionally, for the case of fixed income instruments, transactions meeting the following conditions are considered valid: (4) a) They are traded both in the primary and secondary market in a national stock exchange, at the counter of authorized issuers. (4) b) When the amount negotiated per transaction or the sum of the amounts negotiated of transactions occurring on the same day by the same type of investor, buyer, and seller, for a given instrument, is greater than or equal to twenty thousand United States dollars (US$20,000.00). (4) c) For the case of DGT instruments and foreign securities registered in the national securities market, transactions in regulated and supervised international organized markets that are registered in a national stock exchange will be taken into consideration. (4)

For the consideration of valid transactions of fixed income instruments, the following additional elements will be taken into account: (4)

i. The resulting percentage variation between the Transaction IRR and the IRR of the instrument will be considered. (4)
ii. The resulting percentage variation between the Transaction IRR and the last known Family IRR of the instrument will be considered. (4)
iii. The resulting percentage variation between the Transaction IRR and the weighted average of the Transaction IRRs of the instrument or instruments belonging to the same family, in the analyzed time period, will be considered. (4)
iv. The type of buyer client and type of seller client involved in the transaction will be considered, according to the client types managed by a Stock Exchange. (4)

Valid transactions of variable income instruments are those carried out in the secondary market of a stock exchange and presenting a negotiated amount greater than or equal to the minimum limit of three hundred United States dollars (US$300.00). (4)

Utilization of the valuation price for fixed income instruments (4)

Art. 25-A.- To calculate the market value of a specific instrument on a certain date, the price vector will be multiplied by the nominal value of said instrument on the date corresponding to the price vector. (4)

Operations must be valued on the settlement date, using the price vector corresponding to that date. (4)

In the case of operations involving purchases or sales without coupon rights, for each day from the date the instrument is acquired until the date the coupon ceded to the former holder of the title becomes due, the price vector corresponding to the settlement date must be multiplied by the nominal value of the instrument and the value of the coupon or amount to be paid by the issuer for cancellation of the ceded coupon must be subtracted. (4)

Economic value or market value

Art. 26.- To determine the economic or market value of the investments of the Pension Fund, its present value will be calculated by discounting the future payment flows of the instrument to the relevant IRR of the instrument on the day of valuation. (4)

Transaction IRR (4)

Art. 26-A.- In this Regulation, for fixed income instruments, TIRT will be understood as the annual Internal Rate of Return calculated for each valid transaction, based on information provided by a stock exchange, the Central Bank, and any other issuer, if applicable. The relevant information for the calculation of the Transaction IRR will be the price and settlement date of the instrument, the days to maturity of each of its payment flows, and their respective amounts. All data will be taken excluding the commissions of the Brokerage House nor the Stock Exchange. The price of the title will incorporate accrued interest, if its negotiation takes place on a date different from the placement date, or the coupon payment date. (4)

For instruments from foreign issuers whose returns are taxed with income tax, the price vector will be calculated with the net rate of said tax. (4)

Art. 26-B.- For the case of zero-coupon debentures, the TIRT is calculated by solving the following formula: (4)

TIRT = [ (100 / Pkti) ^ (365 / n) - 1 ] * kti

Therefore, (4)

TIRT = [ (100 / Pkti) ^ (365 / n) - 1 ] * kti

Where: (4)
Pkti = Price of the i-th transaction of instrument k, on day t of calculation. (4) TIRTkti = Transaction IRR, is the annual internal rate of return of the i-th transaction of instrument k, on day t of calculation. (4) n = Number of days between the calculation date t and the maturity date of the instrument. (4) k = Instrument in which investment is made. (4)

Art. 26-C.- For the case of debentures with coupon payments, whether fixed or adjustable rate, the annual Transaction IRR will be calculated following an iteration process and applying the following formula: (4)

Pkti = VFk + Σ [ Cj / (1 + TIRT/365)^nj ]

Where: (4)
Pkti = Price of the i-th transaction of instrument k, on day t of calculation. (4) Cj = Value of the j-th coupon in terms of a monetary unit of Face Value. (4) VFk = Face Value of instrument k in terms of a monetary unit. (4) TIRTkti = Transaction IRR, is the annual internal rate of return of the i-th transaction of instrument k, on day t of calculation. (4) m = Number of coupons remaining to mature. (4) nj = Number of days between calculation date t and the date the j-th coupon matures. (4) n = Number of days between calculation date t and the maturity date of the instrument. (4) k = Instrument in which investment is made. (4)

Instrument IRR (4)

Art. 26-D.- Instrument IRR, TIRI, will be understood as the annual weighted average internal rate of return of the valid transaction IRRs of the same instrument on the same day. TIRI will be determined by first calculating the TIRT of valid transactions, according to the process developed in Articles 26-A to 26-C of this Regulation, of instrument k weighted by the amount each transaction represents relative to the total amount of these on day t of calculation. The above is expressed in the following formula: (4)

TIRIkt = Σ (Mkti * TIRTkti) / Σ Mkti

Where: (4)
TIRIkt = Instrument IRR is the weighted average internal rate of return of the valid transaction IRRs of instrument k registered on day t. (4) TIRTkti = Transaction IRR is the internal rate of return of instrument k in the i-th transaction on day t. (4) Mkti = Amount traded of instrument k in the i-th operation on day t of calculation. (4) z = Number of transactions of instrument k on day t of calculation. (4) k = Instrument in which investment is made. (4)

Instrument Families (4)

Art. 26-E.- All fixed income instruments that meet the same conditions of instrument type, economic maturity range, currency type, issuer, reference rate type, maturity term, and the discount rate of future payment flows of financial instruments, which can be a simple rate or a compound rate, will belong to the same family. (4)

For the currency in which the financial instrument was issued, an international coding will be used, which will be communicated by the Superintendence. (4)

For those debentures with coupon payments with adjustable interest rate, the criterion for grouping will be the reference rate associated with the adjustment of the instrument's interest rate. (4)

Types of Instruments (4)

Art. 26-F.- To group instruments into families, the following types of instruments will also be considered: (4) a) Type 1: Zero-coupon debentures. (4) b) Type 2: Debentures with payment of principal and interest at maturity. (4) c) Type 3: Debentures with periodic interest payments. (4) d) Type 4: Debentures with periodic payment of principal and interest. (4)

Economic Maturity (4)

Art. 26-G.- In order to calculate the Family IRR for fixed income instruments, they must be classified into instrument families, taking into consideration the economic maturity per instrument. (4)

In the case of zero-coupon debentures or securities representing debt and those with payment of principal and interest at maturity, the economic maturity will be equal to the number of days between the date the economic maturity calculation is performed and their maturity date. (4)

In the case of debentures or debt securities with interest payments prior to the maturity of the security, as well as those financial instruments that pay both principal and interest periodically before their maturity, the economic maturity will be expressed as a fraction of a year and will result from weighting the number of days between the date of maturity calculation and the maturity of each of the future coupons to be received, either for interest and/or principal, by the proportion that the economic value of each represents relative to the economic value of the title. (4)

Calculation of Economic Maturity (4)

Art. 26-H.- The formula to determine Economic Maturity will be the following: (4)

PEk = Σ (nj * VPCj) / VEI

Being: (4)
Σ VPCj = Σ (from j=1 to m) VPCj (4)

Where: (4)
PEk = Economic maturity of instrument k, expressed as a fraction of a 365-day year. (4) VPCj = Present value of the j-th coupon. (4) nj = Number of days between the date the measurement is performed and the maturity date of the j-th coupon. A 365-day year will be used. (4) m = Number of coupons active until the maturity of the instrument. (4) VEI = Economic value of the instrument, on the day the calculation is performed. (4) k = Instrument in which investment is made. (4)

Art. 26-I.- The present value of each coupon will be calculated by updating the coupon amount by the Instrument IRR, as defined in Chapter III of Title II of this Regulation. In the case of instruments that have not been traded on that day, for the purposes of calculating the economic maturity, the last recorded IRR of the instrument will be used. (4)

This can be expressed in the following formula: (4)

VPCj = Cj / (1 + TIRIkt/365)^nj

Where: (4)
VPCj = Present value of the j-th coupon. (4)
Cj = Nominal value of the j-th coupon. (4)
TIRIkt = Instrument IRR is the weighted average internal rate of return of the valid transaction IRRs of instrument k registered on day t. (4) nj = Number of days between the calculation date and the maturity date of the j-th coupon. (4) k = Instrument in which investment is made. (4)

Assignment of economic maturity range (4)

Art. 26-J.- According to the economic maturity range of the instruments, they are classified as follows: (4)

Range (in days) Classification
1 ≤ Economic Maturity ≤ 7 A
7 < Economic Maturity ≤ 30 B

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DECRETO No. 21/1998
REGLAMENTO DE INVERSIONES PARA EL SISTEMA DE AHORRO PARA PENSIONES Aprobación: 18/02/1998 Vigencia: 07/03/1998

30 < Plazo Económico ≤ 65 C
65 < Plazo Económico ≤ 100 D
100 < Plazo Económico ≤ 160 E
160 < Plazo Económico ≤ 250 F
250 < Plazo Económico ≤ 365 G
365 < Plazo Económico ≤ 600 H
600 < Plazo Económico ≤ 800 I
800 < Plazo Económico ≤ 1,100 J
1,100 < Plazo Económico ≤ 1,250 K
1,250 < Plazo Económico ≤ 1,450 L
1,450 < Plazo Económico ≤ 1,800 M
1,800 < Plazo Económico ≤ 2,200 N
2,200 < Plazo Económico ≤ 2,650 O
2,650 < Plazo Económico ≤ 3,150 P
3,150 < Plazo Económico ≤ 3,650 Q
3,650 < Plazo Económico ≤ 4,150 R
4,150 < Plazo Económico ≤ 4,650 S
4,650 < Plazo Económico ≤ 5,150 T
5,150 < Plazo Económico U

Art. 26-K.- Additional familiarization criteria will be applied when an instrument differs from other instruments due to particularities it possesses, such as guarantees, risk classification, inclusion of options such as early redemption by the issuer or buyer; instruments from the same issuer traded in different markets, national and international; liquidity, fiscal year for public securities, and mandatory investments in instruments whose characteristics are determined by law. If additional criteria arise beyond those mentioned above, these will be proposed by the Superintendence to the Standards Committee of the Central Bank for approval and will be made known to the AFPs prior to their use. (4)

Family IRR (4)

Art. 26-L.- Family Internal Rate of Return, TIRF, shall be understood as the annual weighted average internal rate of return of the IRRs of the financial instruments that make up said family. The Family IRR is the discount rate used in the calculation of the valuation prices of the financial instruments. (4)

DE No. 21/1998
DECRETO No. 21/1998
REGLAMENTO DE INVERSIONES PARA EL SISTEMA DE AHORRO PARA PENSIONES Aprobación: 18/02/1998 Vigencia: 07/03/1998

∑(Mkt * TIRIt) / ∑Mkt = TIRFt

Where: (4)

TIRFt = Family IRR, is the annual weighted average internal rate of return of the IRRs of the Instruments that make up said Family on the calculation day t. (4) TIRIkt = IRR of the Instrument is the weighted average internal rate of return of the valid transactions of instrument k, registered on the calculation day t. (4) Mkt = Amount traded of instrument k on the calculation day t. (4) z = Number of instruments that make up the family on the calculation day t. (4) k = Instrument in which investment is made. (4)

Generation of Family IRR (4)

Art. 26-M.- For valuation purposes, each of the instruments in a family will be discounted at the corresponding Family IRR. For the calculation of the Family IRR, the following cases are contemplated: (4)

a) If all instruments that make up the family were traded on the calculation day, the Family IRR will be the weighted average of each of the IRRs of all the instruments that compose it; (4)

b) If in a family there are traded and non-traded instruments, the Family IRR will be the simple average of the IRRs of all non-traded instruments and the weighted average IRR of the instruments traded on the valuation day, as calculated in the previous letter; (4)

c) In the case that on a given day no instrument from the same family is traded, the IRR of that family will be the corresponding Family IRR of the immediate previous day; (4)

d) When an instrument changes family, future cash flows will be discounted with the IRR of the destination family; and, (4)

e) If on a given day a new family arises, that is, one that has not been defined previously and the instruments that make it up were not traded on that day, the Family IRR will be the simple average of the Family IRRs from which each of them originates. (4)

On the first business day of the month, if none of the instruments that make up a family are traded on that day, the IRR of this family will be updated with the average of the IRRs of the instruments that make it up. (4)

When only one instrument is found within the family, the Family IRR will be equal to the IRR of the instrument. (4)

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DECRETO No. 21/1998
REGLAMENTO DE INVERSIONES PARA EL SISTEMA DE AHORRO PARA PENSIONES Aprobación: 18/02/1998 Vigencia: 07/03/1998

Daily Family IRR (4)

Art. 26-N.- The calculation of the Daily Family IRR is made from the Annual Family IRR in the following manner:

TIRFt,diaria = ((1 + TIRFt/100)^(1/365) - 1) * 100

(4)

Where: (4)

TIRFt,diaria = Daily Family IRR, is the annual internal rate of return of said family in its daily equivalent. (4) TIRFt = Family IRR, is the annual weighted average internal rate of return of the IRRs of the Instruments that make up said Family on the calculation day t. (4)

CHAPTER II
OF ZERO COUPON BONDS OR NEGOTIABLE OBLIGATIONS

Art. 27.- Zero coupon bonds or negotiable obligations are those securities issued in accordance with the provisions of the Commercial Code and the Securities Market Law, and which entail the obligation of the issuer to pay at maturity, solely, the face value of the obligation.

Art. 28.- The valuation of zero coupon bonds will be carried out as follows: (4)

a) Discount with simple interest rate: (4)

VPkt = VFkj / (1 + (TIRFdiaria * n) / 100)

(4)

b) Discount with compound interest rate: (4)

VPkt = VFkj / (1 + TIRFdiaria/100)^n

(4)

Where:

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DECRETO No. 21/1998
REGLAMENTO DE INVERSIONES PARA EL SISTEMA DE AHORRO PARA PENSIONES Aprobación: 18/02/1998 Vigencia: 07/03/1998

VPkt = Present value of a nominal monetary unit of instrument k on the calculation day t, which will correspond to the valuation price of said instrument. (4) VFkj = Face value on day j of maturity of a nominal monetary unit of instrument k. (4) TIRFdiaria= Daily Internal Rate of Return of the Family in its daily equivalent. (4) n= Number of days between the calculation date (day t) and the date on which the instrument matures. k = Instrument in which investment is made. (4)

CHAPTER III
OF BONDS OR NEGOTIABLE OBLIGATIONS WITH COUPON PAYMENT

Art. 29.- Bonds or negotiable obligations with coupon payment are those securities issued in accordance with the provisions of the Commercial Code and the Securities Market Law, and which entail the obligation on the part of the issuer to pay interest and/or capital before their maturity. Likewise, this same methodology will be applied to instruments that pay both capital and interest at their maturity.

Art. 30.- Negotiable obligations issued with coupon payment will be valued at the present value of the future payment flows of the instrument, discounted at the Family IRR on the day of valuation. The valuation for this type of instrument will be carried out as follows: (4)

VPkt = ∑[Cj / (1 + TIRFdiaria/100)^nj] + [VFkj / (1 + TIRFdiaria/100)^n]

(4)

Where: (4)

VPkt = Present value of a nominal monetary unit of instrument k on the calculation day t, which will correspond to the valuation price of said instrument. (4) VFkj = Face value on day j of maturity of a nominal monetary unit of instrument k. (4) Cj = Value of the j-th coupon in terms of a monetary unit of the Face Value. (4) m = Number of remaining coupons to mature. (4) nj = Number of days between the calculation date t and the date on which the j-th coupon matures. (4) n = Number of days between day t of calculation and day j on which the instrument matures. (4) TIRFdiaria = Family Internal Rate of Return in its daily equivalent. (4) k = Instrument in which investment is made. (4)

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DECRETO No. 21/1998
REGLAMENTO DE INVERSIONES PARA EL SISTEMA DE AHORRO PARA PENSIONES Aprobación: 18/02/1998 Vigencia: 07/03/1998

Valuation of Negotiable Obligations with Adjustable Interest Rate (4)

Art. 31.- Bonds or obligations with adjustable interest rate shall be understood as those securities whose future interest flows are unknown, with the exception of the nearest one(s) to mature, according to the adjustability of the known interest rate. (4)

Art. 31-A.- Negotiable obligations with adjustable interest rate will be valued daily according to their economic value, considering for this purpose a reference rate, which will be the basis for projecting the unknown future flows. (4) To project the future flows of the coupons for which the rate is unknown, this will be estimated based on the reference rate of the instrument, to which a surcharge will be added, in accordance with the characteristics of the issuance. (4) On the first business day of the month, the reference rate to calculate the coupon rate of the unknown coupons will be updated using the reference rate in effect at the close of the previous month, as applicable, or in its absence, the one available in the market. (4)

Art. 31-B.- The valuation of these instruments will be carried out as follows: (4)

VPkt = ∑[Cj / (1 + TIRFdiaria/100)^nj] + [VFk / (1 + TIRFdiaria/100)^n]

(4)

Where: (4)

VPkt = Present value of a nominal monetary unit of instrument k on the calculation day t. (4) VFk = Value of instrument k, expressed in a nominal monetary unit on the day of its maturity.
(4)
Cj = Value of the j-th coupon in terms of a monetary unit of the Face Value. (4) nj = Number of days between the calculation date (day t) and the date on which the i-th coupon matures. (4) n = Number of days between the calculation date, and the maturity date of the instrument. (4) TIRFdiaria = Family internal rate of return in its daily equivalent. (4) k = Instrument in which investment is made. (4)

Valuation of Negotiable Obligations with Payment of Interest and Capital before their Maturity (4)

Art. 31-C.- Bonds or negotiable obligations with payment of interest and capital before their maturity are those securities issued in accordance with the provisions of the Commercial Code and of

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DECRETO No. 21/1998
REGLAMENTO DE INVERSIONES PARA EL SISTEMA DE AHORRO PARA PENSIONES Aprobación: 18/02/1998 Vigencia: 07/03/1998

the Securities Market Law and which entail the obligation on the part of the issuer, to pay both capital and interest prior to the maturity of the security. (4)

Art. 31-D.- Negotiable obligations issued with payment of interest and capital will be valued at the present value of the future payment flows of the instrument, discounted at the Family IRR on the day of valuation. The valuation for this type of instrument will be carried out as follows: (4)

VPkt = ∑[δj / (1 + TIRFdiaria/100)^nj]

(4)

Where: (4)

VPkt = Present value of a nominal monetary unit of instrument k on the calculation day t, which will correspond to the valuation price for said instrument. (4) δj = Factor representing the j-th cash flow of capital and interest, expressed in a monetary unit of the Face Value. (4) m = Number of interest plus capital payments remaining to mature. (4) nj = Number of days between the calculation date t and the date on which the j-th payment of interest plus capital matures. (4) n = Number of days between the calculation date t and the date on which the instrument matures. (4) TIRFdiaria = Daily Internal Rate of Return of the Family. (4) k = Type of Instrument in which investment is made. (4)

CHAPTER IV (4)
OF FIXED-TERM DEPOSIT CERTIFICATES (4)

Art. 32.- Deposit certificates with terms greater than ninety days, with payment of interest and amortizations at maturity or prior to their maturity, will be valued independently of their issuance rate, accruing interest daily until the maturity date, in accordance with the formula established in Art. 44-G.- of Title II, for repurchase agreements. (4)

Art. 33.- The valuation of fixed-term deposit certificates will be carried out daily by each AFP, in accordance with this Chapter. (4)

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DECRETO No. 21/1998
REGLAMENTO DE INVERSIONES PARA EL SISTEMA DE AHORRO PARA PENSIONES Aprobación: 18/02/1998 Vigencia: 07/03/1998

CHAPTER V
OF COMMON AND PREFERRED SHARES

Art. 34.- The denomination of shares, as well as the rights and obligations generated by common and preferred shares, will be subject to what is provided in the Commercial Code.

Art. 35.- The methodology for the valuation of common and preferred shares to be applied depends on the existence of valid transactions in said shares, in a period of ninety days. (4)

Art. 36.- Shares acquired with resources from the Pension Fund that have effectively registered valid transactions in the last ninety days will be valued as follows: (4)

a) Daily, according to the weighted average price of valid transactions of the last ten trading days on a Stock Exchange, including the valuation date. These ten days will be considered within a maximum period of sixty calendar days. The price of the share will be weighted by the percentage that the number of units traded in each of the operations represents, with respect to the total traded on the days indicated. (4)

b) When the ten days with required transactions do not exist within the period established in the previous letter, only those days in which valid transactions were effectively carried out within said period will be considered. (4)

c) In the case of no valid transactions in the entire period, for valuation purposes, the weighted average price of the last day of valid transactions registered will be maintained. (4)

The valuation mentioned in letters a) and b) of this article is expressed with the following formula: (4)

PVkt = ∑(Qkt * Pkt) / ∑Qkt

(4)

For n ≤ 10 days (4)

Being: (4)

Qkt = ∑qkti

(4)

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Pkt = ∑(pkti * qkti) / ∑qkti

(4)

Where: (4)

PVkt = Valuation price of share k on day t. (4) Pkt = Weighted average price of share k on day t. (4) Qkt = Total amount traded of share k on day t. (4) pkti = Price of share k in the i-th operation on day t. (4) qkti = Amount traded associated with the i-th operation of share k on day t. (4) n = Number of days considered. (4) z = Number of operations of share k on day t. (4) k = Share in which investment is made. (4)

Payment of Cash Dividends (4)

Art. 37.- When a company distributes cash dividends, the price of its shares will be reduced by the amount of the dividend on the day of payment thereof. The foregoing is expressed through the following formula: (4)

PVkT = ∑(Qkt * Pkt) / ∑Qkt

(4)

∑Qkt = ∑qkti

(4)

Pkt = ∑((pkti - Dv) * qkti) / ∑qkti

(4)

For n ≤ 10 days (4)

Where: (4)

PVkT = Valuation price of share k on day T of calculation for delivery of cash dividends.
(4)
Pkt = Weighted average price of share k on day t. (4)

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Qkt = Total amount traded of share k on day t. (4) Dv = Cash dividend per share. (4) pkti = Price of share k in the i-th operation on day t. (4) qkti = Amount traded associated with the i-th operation of share k on day t. (4) n = Number of days considered. (4) z = Number of operations of share k on day t. (4) k = Share in which investment is made. (4)

Payment of Dividends in the Form of Shares (4)

Art. 37-A.- When a company distributes dividends in the form of shares, that is, it issues new shares, the price of its shares will be adjusted, applying the ratio of the number of new shares issued on the day of dividend delivery to the number of shares on the day before the delivery of dividends, l, applying it in the following formula: (4)

PVkT = ∑(Qkt * Pkt) / ∑Qkt

(4)

∑Qkt = ∑qkti

(4)

Pkt = ∑(pkti * (1 + l) * qkti) / ∑qkti

(4)

For n ≤ 10 days (4)

Where: (4)

PVkT = Adjusted price of share k on day T of calculation for delivery of dividends in shares. (4) Pkt = Weighted average price of share k on day t. (4) Qkt = Total amount traded of share k on day t. (4) pkti= Price of share k in the i-th operation on day t. (4) l = Ratio of the new number of shares on the day of dividend delivery to the number of shares on the day before the delivery of dividends. (4) qkti= Amount traded associated with the i-th operation of share k on day t. (4) n = Number of days considered. (4) z = Number of operations of share k on day t. (4)

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k = Share in which investment is made. (4)

The change in price, as in the case of cash dividends, will be carried out on the payment day.
(4)

Payment of Mixed Dividends (4)

Art. 37-B.- If the company delivers dividends in a mixed form, that is, in cash and in shares, the adjusted price will be calculated by applying the following formula: (4)

PVkT = ∑(Qkt * Pkt) / ∑Qkt

(4)

∑Qkt = ∑qkti

(4)

Pkt = ∑((pkti * (1 + l) - Dv) * qkti) / ∑qkti

(4)

For n ≤ 10 days (4)

Where: (4)

PVkT = Adjusted price of share k on day T of calculation for mixed delivery of dividends. (4) Pkt = Weighted average price of share k on day t. (4) Qkt = Total amount traded of share k on day t. (4) pkti= Price of share k in the i-th operation on day t. (4) Dv = Cash dividend per share. (4) l = Ratio of the new number of shares on the day of dividend delivery to the number of shares on the day before the delivery of dividends. (4) qkti = Amount traded associated with the i-th operation of share k on day t. (4) n = Number of days considered. (4) z = Number of operations of share k on day t. (4) k = Share in which investment is made. (4)

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Art. 37-C.- When the shares of a company have not registered valid transactions in the last ninety days, these will be valued in accordance with the last valuation price calculated.
(4)

Art. 37-D.- The AFPs will be responsible for sending to the Superintendence, through the electronic means defined by it, information regarding capital variations and payment of dividends of the investments in shares that it has made with resources from the Pension Funds, at least five business days prior to the payment date. When the preferential right of subscription of shares for capital increase is exercised, the information must be sent no later than five calendar days after receiving notification from the Assembly on the capital increase. (4)

Valuation of Common Shares and Preferred Shares by Subscription of New Shares (4)

Art. 38.- When a company calls for capital and shareholders exercise their preferential right of subscription of new shares, the number of shares in circulation of the same increases, as well as the assets by the amount of money resulting from the exercise of such rights. (4)

Art. 38-A.- For the above reason, the valuation price of the shares on the calendar day following the end of the subscription period for new shares will be determined in accordance with the following methodology: (4)

a) If on the calendar day following the end of the subscription period for new shares, transactions occur in the secondary market of a Salvadoran stock exchange, the valuation price of said shares will be calculated, in accordance with the valuation methodology described in Chapter V of Title II of this Regulation. (4)

b) If on the calendar day following the end of the subscription period for new shares, no transactions occur in the secondary market of a Salvadoran stock exchange, the valuation price of said shares will be calculated, in accordance with the following methodology: (4)

PVkt = (Vm + M) / (N + Nq)

(4)

Being: (4)

Vm = N x PVk(t-1)

(4)

M = Nq x Ps

(4)

Where: (4)

PVkt = Valuation price of share k on day t following the end of the exercise period of the preferential right of subscription of new shares fixed by the company. (4)

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Vm = Market value of the share capital of the company before the subscription of new shares.
(4)
PVk(t-1) = Last valuation price corresponding to the day of end of the exercise period of the preferential right of subscription of new shares fixed by the company (t-1). (4) M = Amount of money in which the share capital of the company increases by the subscription of new shares. (4) N = Number of shares in circulation prior to the subscription of new shares. (4) Nq = Number of new shares subscribed. (4) Ps = Subscription price of the new shares subscribed. (4) k = Share in which investment is made. (4)

Valuation of Subscription Rights of Shares of National Companies (4)

Art. 38-B.- The right of subscription of shares of national companies, hereinafter DSA, in accordance with the provisions of the Commercial Code and the Securities Market Law, is the right acquired by the Pension Funds and which originates from their status as shareholders of companies that carry out the issuance of new shares. (4) The valuation of the DSA will depend on whether transactions are recorded in formal markets. (4)

a) Valuation with transactions in formal markets: (4)

i. When transactions are registered in both primary and secondary markets, the DSA will be valued daily according to the weighted average value of the transactions registered on the day of valuation. (4)

ii. The weighted average value of the DSA will be obtained by averaging the price of each of the valid transactions weighted by the number of units traded in each of the operations with respect to the total of the DSA traded on the indicated day. (4)

iii. The price will be determined according to the following formula: (4)

PDSAkt = ∑(PDSAti * Qti) / ∑Qti

(4)

Where: (4)

PDSAkt = Valuation price of the DSA k for day t. (4) PDSAti = Price of the i-th operation of the DSA k on day t. (4) Qti = Number of DSA associated with the i-th operation of the DSA k, on day t. (4) N = Number of operations carried out of the DSA k verified on day t. (4)

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iv. In the event that there are no valid transactions on a given day, the DSA will be valued according to the following formula: (4)

PDSAkt = PVkt - PVSk
(4)

Where: (4)
PDSAkt = Valuation price of DSA k for day t. (4) PVkt = Valuation price of share k for day t. (4) PVSk = Subscription price of share k. (4)

b) Valuation without transactions in formal markets: (4)
i. When there are no transactions in the primary and secondary markets, the valuation price of the DSA will be determined by applying the following formula: (4)

PDSAkt = (PVkt + C) - PVSk
(4)

Where: (4)
PDSAkt = Valuation price of DSA k for day t. (4) PVkt = Valuation price of share k on day t. (4) PVSk = Subscription price of share k. (4) C = Number of new shares to be issued for each old share. (4)

ii. For subsequent days and as long as there are no DSA transactions in the markets, the valuation price will be obtained daily by subtracting the subscription price of the shares from the market price of the shares. (4)

iii. The valuation price will be obtained by applying the following formula: (4)

PDSAkt = PVkt - PVSk
(4)

Where: (4)
PDSAkt = Valuation price of DSA k for day t. (4) PVkt = Valuation price of share k on day t, and so on. (4) PVSk = Subscription price of share k. (4)

iv. If the company decides to distribute dividends, the valuation price of share k (PVkt) and the subscription price of share k (PVSk) will be adjusted downward by the value of the dividend. (4)

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CHAPTER VI
OF CONVERTIBLE BONDS INTO SHARES

Art. 39.- For the purposes of this Regulation, bonds or debentures convertible into shares are debt instruments that entail the obligation on the part of the issuer to pay interest while granting the investor the option to convert them into a certain number of shares, and which are issued in accordance with the Commercial Code, Securities Market Law, and other applicable laws.

Art. 40.- The investments of Pension Funds in bonds or debentures convertible into shares, both in the primary and secondary markets, will be valued as follows:
a) Convertible debentures with a fixed interest rate and periodic interest payments will be valued daily according to their economic value, considering the IRR of the Family, and applying the valuation method contemplated in Chapter III of Title II of this Regulation. (4) b) Convertible debentures with a adjustable interest rate will be valued in a manner analogous to the rest of the fixed-income instruments with adjustable rates, the methodology for which is defined in this Regulation. (4)

CHAPTER VII
VALUATION OF PARTICIPATION UNITS OF LOCAL OPEN AND CLOSED INVESTMENT FUNDS (4)

Art. 41.- An Investment Fund, in accordance with the Investment Funds Law, will be formed by the set of contributions from various investors, who will be called participants; it will be administered by a corporation called the Manager, at the account and risk of the investors. (4) Open Investment Funds will be understood as those that do not have a defined term and participants can redeem their participation units at any time, in whole or in part. The participation units of these Funds will be considered, for the purposes of this Regulation, as equity instruments. (4) Closed Investment Funds will be understood as those that have a defined term and participants will only be able to receive what corresponds to them from their participation units at the end of the Fund's term and in the cases established in the Investment Funds Law, with their participation units being negotiable in the secondary market. The participation units of these Funds will be considered, for the purposes of this Regulation, as equity instruments. (4)

Art. 42.- The methodology to be applied for the valuation of participation units of Closed Investment Funds depends on the existence of valid transactions in said units over a period of ninety days. (4)

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Art. 43.- REPEALED. (4)

Art. 43-A.- The participation units of a Closed Investment Fund will be valued as follows: (4) a) Methodology 1: (4) Closed Investment Fund Units that have recorded valid transactions in the last ninety days will be valued according to the methodology applied to shares of corporations described in Chapter V of Title II of this Regulation. (4) b) Methodology 2: (4) The participation units of Closed Investment Funds that have not recorded valid transactions in the last ninety days will be valued daily at their book value. The AFPs must obtain from the Investment Fund Manager the closing price of the Fund's participation unit corresponding to the day of valuation. (4)

Open Investment Fund Units (4)

Art. 43-B.- The participation units of an Open Investment Fund will be valued daily at their book value. The AFPs must obtain from the Investment Fund Manager the closing price of the Fund's participation unit corresponding to the day of valuation. (4)

CHAPTER VIII REPEALED (4)
OF OTHER PUBLIC OFFERING INSTRUMENTS REPEALED (4)

Art. 44.- REPEALED. (4)

CHAPTER IX (4)
FOREIGN SECURITIES AND PARTICIPATION CERTIFICATES OF FOREIGN INVESTMENT FUNDS (4)

Art. 44-A.- In accordance with article 91 of the SAP Law, foreign securities and participation units of Foreign Investment Funds, except Open Investment Funds, must be registered in a Salvadoran stock exchange and comply with the requirements contemplated in the respective Securities Market legislation, have been subjected to a risk classification process, be within the minimum classification established by the Risk Committee, when applicable, and be governed by what is established in this Regulation. (4) All transactions of securities carried out with the resources of the Pension Funds must be made within a national stock exchange, both in the primary and secondary markets. Notwithstanding the foregoing, the AFPs may acquire or redeem directly through the Managers or Administrators of Investment Funds or their mandataries, the participation units of Salvadoran or foreign Open Investment Funds, as well as, when it comes to primary placement and exercising the preemptive subscription right of participation units of Salvadoran or foreign Closed Investment Funds. (4) Units of Investment Funds that are negotiated in an organized foreign Securities Market and that are representative of stock indices or Fixed Income, will be considered as participation units of Foreign Closed Investment Funds, in accordance with what is established in the Investment Funds Law; therefore, investments made in this type of instrument must comply with what is established in this article and the "Technical Standards for the Registration and Commercialization of Participation Units of Foreign Investment Funds" (NDMC-14) issued by the Central Bank through its Standards Committee. (4) Foreign securities of the same nature as the participation units of Investment Funds and which were transferred ex officio by the Superintendence to the Registry of participation units of Foreign Closed Investment Funds, will be subject to negotiation in the Salvadoran Securities Market under the requirements under which they were authorized or registered, in accordance with what is established in the Investment Funds Law. (4)

Art. 44-B.- Foreign securities and participation units of Foreign Investment Funds will be valued daily at the BID closing price available for the date of valuation, obtained from recognized international stock or financial information systems by the Superintendence. The AFPs must obtain from the aforementioned information systems the closing price corresponding to the day of valuation. (4) For foreign equity securities, the price will be obtained as indicated in the previous paragraph, and for foreign fixed-income securities, the price will be obtained by applying the methodology for instruments of this nature developed in this title, considering transactions of the primary and secondary markets of a national stock exchange; as well as transactions carried out in regulated and supervised international organized markets that are registered in a national stock exchange. (4)

Art. 44-C.- The valuation price of foreign equity securities and participation units of Foreign Investment Funds, obtained for a given day, will govern for the same business day of calculation; for non-business days, the price of the last published business day will be used. The valuation price of foreign fixed-income securities will be provided by the Superintendence, in accordance with what is established in article 24-A of this Regulation. (4)

Art. 44-D.- In the event that a company or Investment Fund distributes dividends to its shareholders or participants, the value of the instrument must be reduced by the amount of the dividend on the day of payment of the dividend. (4)

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Art. 44-E.- In the event that the company or Fund decides to deliver shares or units to its shareholders or participants, respectively, the valuation price will be reduced in the proportion corresponding to the number of shares or units distributed per share or unit, using the same procedure as dividends. That is, if one share or unit is distributed for each share or unit, the price will be reduced by half, while if three are distributed for each share or unit, the price will be reduced to one-fourth. As in the case of dividends, the price change will be effected on the day of payment. (4)

Art 44-F.- The AFPs will be responsible for sending to the Superintendence, by the electronic means defined by it, information regarding capital variations, dividend distribution, or benefit distribution of investments in participation units of Investment Funds, which has been carried out with resources from the Pension Funds, with at least five business days prior to the payment date. When the preemptive subscription right of participation units is exercised for capital increase, the information must be sent no later than five calendar days after receiving notification from the Assembly on the capital increase. (4)

CHAPTER X (4)
OF REPurchase OPERATIONS (4)

Art. 44-G.- Repurchase operations will be understood as short-term investments that AFPs carry out with resources from the Pension Funds, in accordance with what is established in the Commercial Code and the Securities Market Law. (4) Repurchase operations can only be carried out if they are purchases, with titles defined in article 91 of the SAP Law, for a determined term, and will be valued at the yield negotiated on day t, accruing interest daily until the maturity date. (4) The accrued value will be determined based on the following formula: (4)

VPkt = VIk + [(VFk - VIk) / n] * m (4)

Where: (4)
VPkt = Present value of the repurchase operation of instrument k on day t. (4) VIk = Initial value of the repurchase operation of instrument k. (4) VFk = Final value of the repurchase operation of instrument k. (4) VFk = VNk + (VNk * Plazok * RBk) / 365). (4) VNk = Nominal value of the repurchase operation of instrument k. (4) Plazok = Term of the repurchase operation of instrument k. (4) RB k = Gross yield of the repurchase operation of instrument k. (4) Calculation Base = 365 days. (4) m = Number of days elapsed from the initial date to day t. (4)

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n = Number of days existing between the initial and final date. (4) Daily accrual factor of the repurchase operation of instrument k: (4) [(VFk - VIk) / n] (4) The valuation of purchase repos will be carried out daily by each AFP, in accordance with this Chapter. (4)

TITLE III
OF THE PROFITABILITY OF PENSION FUNDS

CHAPTER I
OF THE VALUATION OF THE UNIT

Art. 45.- The value of each Pension Fund will be expressed in units of equal amount and characteristics, in order to determine the participation of each of the affiliates; as well as to distribute the profitability of their investments. This provision includes the Special Guarantee Contribution when it is own resources of the AFP, the Profitability Fluctuation Reserve, and the investment of the AFP in units of the Pension Fund it administers. (4)

Art. 45-A.- The unit value and the number of units of each of the Funds will be calculated daily, including for non-business days. The valuation prices of the investment portfolio for such days will be communicated on the following business day, in order for the AFP to determine the Equity of each Fund and the profitability of each of the non-business days to be used for the calculation of the unit value. (4)

Art. 46.- The AFP will estimate the value of the unit of the Pension Fund for the day of calculation, by dividing the Equity of the Pension Fund by the number of units of the previous day. (4) In terms of formula, it is expressed as follows: (4)

VCki = Pki-n / NCki-n (4)

Where: (4)
VCki = Unit Value of Pension Fund K at the close of calculation day i. (4) Pki-n = Equity of Pension Fund K at the close of the previous day. (4) NCki-n = Number of Units of the Equity of Pension Fund K at the close of the previous day. (4)

Upon entering operations the SAP, the Superintendence will determine the initial value of the unit of the Pension Fund, which will be the same for all AFPs that are authorized and begin operations in the same period. (4)

Art. 46-A.- When an AFP is authorized to operate subsequently to the start of operations of the SAP, the Superintendence will authorize the initial value of the unit of the new Funds. (4)

Art. 47.- REPEALED. (4)

Art. 48.- The AFP will determine, for each day, the number of units of the managed Pension Fund, adding to the balance of the number of units at the start of the day in question, the net number of units issued on that same day; understanding this latter as the algebraic sum of entries and exits of units, on a given day. [1]

Art. 49.- The AFP will determine the monthly average value of the unit of a Pension Fund, by summing the values of the units of each day, divided by the number of days of the month in question. In terms of formula, it is expressed as:

VCkt = Σ(VCki) / n (from i=1 to n)

Where:
VCkt = Average unit value of Pension Fund k of month t.
VCki = Unit value of Pension Fund k on day i. n = Number of calendar days of month t.

Art. 49-A.- The new units issued and those leaving the Fund on day i, will be calculated at the unit value of the Fund of day i. (4)

Art. 49-B.- The number of units of each Fund at the close of day i, will be determined by adding to the number of units of the Fund at the close of the previous day i-1, the number of units issued on day i by inflows to the Fund minus the number of units that left by withdrawals from the Fund on the same day. (4)

NCki = NCk(i-1) + NCEki - NCSki (4)

Where: (4)
NCki = Number of Units of Pension Fund k at the close of day i. (4) NCk(i-1) = Number of Units of Pension Fund k at the close of the previous day i-1. (4) NCEki = Number of Units issued by inflows to Pension Fund k on day i. (4) NCSki = Number of Units that left by withdrawals from Pension Fund k on day i. (4)

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k = Type of Pension Fund. (4)

Art. 49-C.- For the calculation of the unit value and the number of units of each Fund, eight decimals will be used, as well as for presenting the results of the same and storing the data in the information systems. The eighth decimal will be rounded up to the next digit when the ninth decimal is greater than or equal to five; otherwise, it will not be rounded. (4)

CHAPTER II REPEALED (4)
OF THE CALCULATION OF PROFITABILITY REPEALED (4)

Art. 50.- REPEALED. (1)
Art. 51.- REPEALED. (1)
Art. 52.- REPEALED. (4)
Art. 53.- REPEALED. (4)
Art. 54.- REPEALED. (4)
Art. 55.- REPEALED. (4)

CHAPTER III REPEALED (4)
OF THE PROFITABILITY FLUCTUATION RESERVE REPEALED (4)

Art. 56.- REPEALED. (4)
Art. 57.- REPEALED. (4)
Art. 58.- REPEALED. (4)
Art. 59.- REPEALED. (4)

TITLE III-A (4)
SINGLE CHAPTER (4)
OF THE METHODOLOGY TO DETERMINE TRANSACTIONS AT PRICES AWAY FROM THOSE REGISTERED IN THE PRIMARY AND SECONDARY MARKETS (4)

Art. 59-A.- In accordance with the SAP Law, AFPs may not carry out transactions of instruments at prices away from those registered in the primary and secondary markets, which harm the value of the Pension Funds. (4)

For the purpose of determining the cases in which AFPs carry out transactions of instruments at prices away from those registered in the primary and secondary markets, the methodology described in this Chapter will be applied to analyze case by case and will comprise the following stages: (4) a) First stage: consists of the elaboration of clean reference price bands against which the prices of the financial instruments of the operations carried out by the AFPs in the securities negotiations will be compared, in order to identify transactions with prices that are outside said bands; and (4) b) Second stage: consists of an evaluation of the transactions outside the bands identified in the previous stage, considering quantitative and qualitative criteria that explain the reasonableness or not of the negotiated prices, as appropriate to the nature of the instrument. (4) Clean prices will be understood, in the case of fixed income, as those prices published in recognized international stock or financial information systems by the Superintendence and those obtained from the daily valuation price calculated according to the methodology developed in this Regulation. In the case of equity, the clean prices will be equal to the prices published in the aforementioned information systems and those obtained from the corresponding valuation price. (4)

Price bands for instruments with international quotation (4)

Art. 59-B.- To construct the price bands for instruments with international quotation, the clean prices published in recognized international stock or financial information systems will be taken as a base. When it comes to a purchase transaction, the Ask price will be used, and for sale transactions, the Bid price. (4) The price bands for the instruments indicated in the previous paragraph will be generated taking as reference the volatility of their series of clean prices, multiplied by the Z parameter corresponding to a 99% confidence level, assuming a normal distribution. (4) For the determination of the band width, the following procedure must be carried out: (4) a) The return of the instrument under analysis will be calculated through the calculation of the daily logarithmic changes of the historical series of the clean price (of purchase or sale) of the instrument, with the following formula: (4)

Rkt = ln (Pkt / Pkt−1) (4)

Where: (4)
Rkt = Daily logarithmic return of the clean price of instrument k on day t. (4) ln = Natural logarithm operator. (4) Pkt = Clean price of instrument k on day t. (4) Pkt−1 = Clean price of instrument k on the day prior to day t. (4)

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b) The lower and upper limits of the clean reference price bands of the instrument will be calculated. For fixed-income and equity instruments, the lower and upper limits will be established taking as a base the volatility of their series of clean prices, multiplied by the Z parameter corresponding to a 99% confidence level, assuming a normal distribution, using exponential smoothing, where the variance changes over time. For this, a moving time period of 90 days will be considered with the following formula: (4)

σ̂²kt = λσ²k(t-1) + (1 − λ)r²k(t-1) (4)

Where: (4)
σ̂²kt = Variance estimator of the price of instrument k on day t. (4) λ = Fixed parameter of 0.94. (4) σ²k(t-1) = Estimated variance of instrument k on the day prior to day t. (4) r²k(t-1) = Squared return of instrument k on the day prior to day t. (4)

c) Once the variance estimator σ̂²kt is calculated for the day of calculation, the band width of the instrument for the day under analysis will be calculated, using the following formula: (4)

Band Widthkt = σ̂kt * Z(99%) * Pricek(t-1) (4)

Where: (4)
Band Widthkt = Band width of instrument k on day t. (4) σ̂kt = Volatility estimator of instrument k on day t (square root of the variance estimator).
Z(99%) = Z parameter representative of the 99% confidence level in a normal distribution. (4)

d) After calculating the band width, the upper and lower bands of the instrument under analysis will be estimated as follows: (4)

LSkt = P k(t-1) + Band Width kt (4)
LIkt = P k(t-1) - Band Width kt (4)

Where: (4)
LSkt = Upper limit of the clean reference price band of instrument k on calculation day t. (4) LIkt = Lower limit of the clean reference price band of instrument k on calculation day t. (4)

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INVESTMENT REGULATIONS FOR THE PENSION SAVINGS SYSTEM Approval: 02/18/1998 Validity: 03/07/1998

Pkt−1 = Clean price of instrument k from the day before day t. (4)

Notwithstanding the above, in cases where information does not exist for 90 days, the existing information will be used. (4)

Price bands for instruments with national quotation (4)

Art. 59-C.- The price bands for instruments with national quotation will be determined using the following methodology: (4) a) The historical series of the clean price of the instrument, as well as the internal rate of return of the family to which it belongs, its economic term, and its modified duration for the case of fixed-income securities, will be established; (4) b) For each of the instruments analyzed, a historical series of daily clean prices will be formed, expressed in a monetary unit for fixed-income instruments. This series will be composed of the two hundred forty-two (242) business days prior to the date of negotiation of the operation under analysis. In the event that this quantity of records does not exist because it is a recently issued instrument, the historical series will be formed with the days existing from the issuance date; and (4) c) For fixed-income instruments, which include debt securities issued by governments, financial and non-financial entities, the clean price will be calculated from the valuation prices, from which the accumulated interest between the last coupon payment date and the valuation date will be subtracted, for the period between the valuation date and the next coupon payment date, using the following formula: (4)

Pkt = PVkt − (IAkt / SIkt) (4)

Where: (4)
Pkt = Clean price of instrument k on day t. (4) PVkt = Valuation price of instrument k on day t. (4) IAkt = Accumulated interest of instrument k on day t. (4) SIkt = Outstanding balance of instrument k on day t. (4)

Additionally, for said instruments, historical series will be formed for the two hundred forty-two (242) business days mentioned above, of the annualized internal rate of return of the family (TIRF) to which it belongs and of its economic term, calculated in accordance with this Regulation; as well as a historical series of its modified duration, which will be calculated using the following formula: (4)

Dmkt = PEkt / (365 / (1 + TIRFkt)) (4)

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INVESTMENT REGULATIONS FOR THE PENSION SAVINGS SYSTEM Approval: 02/18/1998 Validity: 03/07/1998

Where: (4)
Dmkt = Modified duration of instrument k on day t. (4) PEkt = Economic term in days of instrument k on day t. (4) TIRFkt = Annualized internal rate of return of the family of instrument k on day t. (4)

Art. 59-D.- Once the procedures established in the previous article have been carried out, the lower and upper limits of the reference clean price bands of the instrument will be calculated, in accordance with the following criteria: (4) a) For equity instruments, composed of shares and participation quotas of investment funds, among others, the limits will be established as follows: (4)
i. The daily logarithmic changes of the historical series of the clean price of the instrument will be calculated, using the following formula: (4)

Rkt = ln (Pkt / Pkt−1) (4)

Where: (4)
Rkt = Daily logarithmic return of the clean price of title k on day t. (4) ln = Natural logarithm operator. (4) Pkt = Clean price of instrument k on day t. (4) Pkt−1 = Clean price of instrument k from the day before day t. (4)

The daily logarithmic changes of the price series of two hundred forty-two (242) business days for equity instruments will be calculated from the second day of the series. (4)

ii. The resulting series of logarithmic returns will be ordered in ascending order, that is, from smallest to largest. (4)
iii. The maximum variations of the clean price will be calculated through the averages of the values below and above the asymmetric percentiles ten and ninety, respectively, of the historical series of logarithmic returns of the prices. If necessary, these percentiles will be obtained through interpolation. (4)
iv. Once the maximum variations of the clean price of the instrument for both percentiles have been calculated, the upper and lower limits in which the price of the operations is expected to be located during the day in which the negotiation of the transaction under analysis was carried out will be estimated. The formulas are as follows: (4)

LSkt = Pkt−1 × [1 + ∆PkSt] (4)
LIkt = Pkt−1 × [1 + ∆PkIt] (4)

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INVESTMENT REGULATIONS FOR THE PENSION SAVINGS SYSTEM Approval: 02/18/1998 Validity: 03/07/1998

Where: (4)
LSkt = Upper limit of the reference clean price band of instrument k on day t of calculation. (4) LIkt = Lower limit of the reference clean price band of instrument k on day t of calculation. (4) Pkt−1 = Clean price of instrument k from the day before day t of calculation. (4) ∆PkSt = Average of the clean price returns of instrument k above the ninetieth percentile calculated for day t of calculation. (4) ∆PkIt = Average of the clean price returns of instrument k below the tenth percentile calculated for day t of calculation. (4)

If the maximum variations of the clean price of the instrument are equal to zero, the reference clean price bands will be dispensed with, and the transactions carried out by the AFPs will be submitted for evaluation, solely under the quantitative and qualitative criteria indicated in Article 59-F of this Regulation. (4)

b) In the case of fixed-income instruments, the limits will be determined as follows: (4)
i. The daily logarithmic changes of the historical series of the annualized internal rate of return of the family (TIRF) of the instrument will be calculated using the following formula: (4)

Rkt = ln (TIRFkt / TIRFkt−1) (4)

Where: (4)
Rkt = Return of the annualized internal rate of return of the family of instrument k on day t. (4) ln = Natural logarithm operator. (4) TIRFkt = Annualized internal rate of return of the family of instrument k on day t. (4) TIRFkt−1 = Annualized internal rate of return of the family of instrument k from the day before day t. (4)

The daily logarithmic changes of the series of the annualized TIRF of two hundred forty-two (242) business days for fixed-income instruments will be calculated from the second day of the series. (4)

ii. The resulting series of logarithmic returns will be ordered in ascending order, that is, from smallest to largest. (4)
iii. The maximum variations of the annualized TIRF will be calculated, through the averages of the values below and above the asymmetric percentiles ten and ninety, respectively, of the historical series of logarithmic returns of the annualized TIRF. If necessary, these percentiles will be obtained through interpolation. (4)

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INVESTMENT REGULATIONS FOR THE PENSION SAVINGS SYSTEM Approval: 02/18/1998 Validity: 03/07/1998

iv. The maximum variations of the annualized TIRF will be calculated using the following formulas: (4)

∆iSt = [TIRFkt−1 × (1 + ∆TIRFkSt)] − TIRFkt−1 (4) ∆iIt = [TIRFkt−1 × (1 + ∆TIRFkIt)] − TIRFkt−1 (4)

Where: (4)
∆iSt = Maximum positive absolute variation of the annualized TIRF on day t of calculation. (4) ∆iIt = Maximum negative absolute variation of the annualized TIRF on day t of calculation. (4) TIRFkt−1 = Internal rate of return of the family of instrument k from the day before day t of calculation. (4) ∆TIRFkSt = Average of the values above the ninetieth percentile of the series of returns of the TIRF of instrument k from the day before day t of calculation. (4) ∆TIRFkIt = Average of the values below the tenth percentile of the series of returns of the TIRF of instrument k from the day before day t of calculation. (4)

v. Once the maximum variations of the annualized TIRF have been calculated, the upper and lower limits in which the clean price of the operations of an instrument is expected to be located for the day under analysis will be estimated, taking into consideration that the relationship between the prices of fixed-income instruments and market interest rates is inverse. The formulas for calculating the limits are as follows: (4)

LSkt = Pkt−1 × [1 + (−Dmkt−1 × ∆iIt)] (4)
LIkt = Pkt−1 × [1 + (−Dmkt−1 × ∆iSt)] (4)

Where: (4)
LSkt = Upper limit of the reference clean price band of instrument k on day t of calculation. (4) LIkt = Lower limit of the reference clean price band of instrument k on day t of calculation. (4) Pkt−1 = Clean price of instrument k from the day before day t of calculation. (4) Dmkt−1 = Modified duration of instrument k from the day before day t of calculation. (4) ∆iSt = Maximum positive absolute variation of the annualized TIRF. (4) ∆iIt = Maximum negative absolute variation of the annualized TIRF. (4)

If the maximum absolute variations of the TIRF of the instrument are equal to zero, the reference clean price bands will be dispensed with, and the transactions carried out by the AFPs will be submitted for evaluation, solely under the quantitative and qualitative criteria indicated in Article 59-F of this Regulation. (4)

Comparison of the purchase and sale negotiation prices of the instrument with respect to the reference clean price bands (4)

Art. 59-E.- From the reference clean price bands, established in Article 59-D of this Regulation, it will be determined whether the operations carried out by the AFPs for each of the negotiated instruments are outside the historical behavior on the negotiation day. (4)

Quantitative and qualitative criteria for the evaluation of transactions (4)

Art. 59-F.- After the first stage of identification using reference clean price bands, the second stage will be carried out, proceeding to evaluate the operations carried out by the AFPs with prices that are outside the aforementioned bands, considering quantitative and qualitative criteria to confirm the reasonableness or not of the negotiated prices, in order to consider them as operations at prices far from primary and secondary market prices, according to the nature of the instrument. These criteria will be the following: (4)

a) For equity instruments: (4)
i. Percentage difference of the price of the transactions carried out by an AFP, with respect to the simple average of the prices observed in operations of the same instrument carried out by investors other than the AFP, on the negotiation day and during the last five days where negotiations of the instrument are registered in the national securities market, within a period of ninety days. The reasonableness of said percentage difference will be determined with the analysis of the criteria stated in numerals ii. and iii. below. (4)

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ii. Changes in the risk classification of the issuer that imply changes in its credit quality regarding the capacity to pay contractual obligations. (4)
iii. Relevant events that affect the value of the share, such as: (4)

1. Internal events of the issuing company, such as mergers and acquisitions, income reports, suspension of dividends, development or approval of new products, hiring or dismissal of executives, fraud or negligence complaints, and reputational risk; (4)
2. External economic events to the issuing company, such as variations in interest rates and exchange rates; as well as actions taken by the competition; and (4)
3. World events such as wars, natural disasters, and epidemics. (4)
   iv. Impact of the operations carried out on the market risk of the portfolio. (4)

b) For fixed-income instruments: (4)
i. Percentage difference of the price as a percentage of its par value of the transactions carried out by an AFP, with respect to the simple average of the prices observed in operations of the same instrument or similar ones carried out by investors other than the AFP, on the negotiation day and during the last five days where negotiations of the instrument are registered in the national securities market, within a period of ninety days. The reasonableness of said percentage difference will be determined with the analysis of the criteria stated in romans iii, iv, v, and vi below. (4)

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ii. Difference in basis points of the annualized TIR of the transaction or transactions carried out by an AFP, with respect to the simple average of the annualized TIRs observed in operations of the same instrument or similar ones carried out by investors other than the AFP, on the negotiation day and during the last five days where negotiations of the instrument are registered in the national securities market, within a period of ninety days. The reasonableness of said difference in basis points will be determined with the analysis of the criteria stated in romans iii, iv, v, and vi below. (4)

Notwithstanding, when it comes to foreign securities, in addition to local transactions, information from the prices and yields of transactions carried out in the stock exchanges of their country of origin, when they exist, or in their absence, information disclosed in stock market or international financial information systems recognized by the Superintendency, may also be taken as a reference for the analysis. (4)

iii. Changes in the risk classification of the issuer that imply changes in the credit quality of the same regarding the capacity to pay contractual obligations. (4)
iv. Changes in the risk classification of the issuance in consideration of the solvency of the issuer, the probability of payment of capital and interest, the characteristics of the instrument, and the available information for its classification. (4)
v. Variations in market interest rates and exchange rates that may influence the price of the instruments. (4)
vi. Illiquidity of the instrument in the market. (4)
vii. Impact of the operations carried out on the market risk of the portfolio. (4)

In the case of roman vi of this article, the applicable legal and regulatory provisions of the Salvadoran securities market must be considered. (4)

Art. 59-G.- Within the analysis of transactions of equity and fixed-income instruments, the liquidity needs of the Pension Fund, the operations carried out with related companies to the AFP, and whether the purchase and sale posture of a transaction was carried out by the same Brokerage House will also be considered. For the purposes of this article, a related company will be understood as that referred to in Article 99 of the SAP Law. (4)

TITLE IV
TRANSITIONAL AND FINAL PROVISIONS
CHAPTER I
TRANSITIONAL PROVISIONS

Art. 60.- In addition to the investment limits indicated in this Regulation, the special provision established in Art. 223 of the Law, relating to the Transitional Regime of Investments for Housing Financing, must be complied with.

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In this sense, the AFPs must maintain invested a minimum percentage of the asset of the Pension Fund they administer in securities with mortgage or pledge guarantee on mortgage portfolio issued by the FSV, intended for Housing Financing of employees affiliated with both the SPP and the SAP.

The minimum investment percentages that the AFPs will maintain with respect to the asset of the Pension Fund in securities issued by the FSV will be in accordance with the following table:

Year % of Pension Fund Asset
First 30%
Second 29%
Third 28%
Fourth 27%
Fifth 26%
Sixth 25%
Seventh 24%
Eighth 23%
Ninth 22%
Tenth 20%
Eleventh 18%
Twelfth 16%
Thirteenth 14%
Fourteenth 12%
From the fifteenth 10%

The AFPs will only be obligated to comply with the investment limits in such instruments when the available quantities of them allow it.

The instruments issued by the FSV will accrue market rates, understood as this the average interest rate of one hundred eighty (180) day time deposits published by the BCR plus one percentage point, or at least, an annual interest rate of four percent (4%) on the annual variation of the Consumer Price Index, reviewable at least quarterly. In addition, the terms of these titles must be congruent with the terms of the active operations developed by the FSV.

Likewise, these instruments will be subject to the risk classification process established by the Law.

CHAPTER II
FINAL PROVISIONS

Art. 61.- REPEALED. (4)

Use of years for calculations

Art. 61-A.- All calculations of this Regulation will be made with years of 365 days. (4)

Art. 61-B.- The electronic transfer of information between the AFPs and the Superintendency will be regulated in accordance with the technical norm issued for such purposes by the Central Bank, through its Committee of Standards. (4)

Art. 61-C.- The Central Reserve Bank of El Salvador must issue an illustrative document with examples for each methodology developed in this Regulation. (4)

Art. 62.- REPEALED. (4)

Art. 63.- REPEALED. (4)

Art. 64.- REPEALED. (4)

Art. 65.- REPEALED. (4)

Art. 66.- Non-compliance with the norms contained in this Regulation will be sanctioned in accordance with what is established in the Law.

Art. 67.- Any aspect not contemplated in this Regulation in matters of regulation will be resolved by the Central Bank through its Committee of Standards, in accordance with the Law. (4)

Art. 68.- This Decree will enter into force eight days after its publication in the Official Diary.

GIVEN IN THE PRESIDENTIAL HOUSE: San Salvador, on the eighteenth day of the month of February of nineteen hundred ninety-eight.

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DECRETO No. 21/1998
INVESTMENT REGULATIONS FOR THE PENSION SAVINGS SYSTEM Approval: 02/18/1998 Validity: 03/07/1998

ARMANDO CALDERON SOL,
President of the Republic.
MANUEL ENRIQUE HINDS,
Minister of Finance.
EDUARDO TOMASINO HURTADO,
Minister of Labor and Social Security.

MODIFICATIONS:
1) D.E. No. 126, D.O. No. 240, Volume 341, of December 23, 1998.
2) D.E. No. 39, D.O. No. 52, Volume 354, of March 15, 2002.
3) D.E. No. 28, of March 27, 2009, D.O. 89, Volume No. 383, of May 18, 2009.
4) D.E. No. 21, of May 3, 2019, D.O. 80, Volume No. 423, of May 3, 2019.

Published in Official Diary No.40
Volume 338, of February 27, 1998.