Spot and forward transactions, repos, collateralized loans, other derivatives and mutual investment funds; breaches of minimum capital requirements and technical ratios; minimum capital requirements; net global foreign currency position; adjustments

2019 - YEAR OF EXPORT

COMMUNICATION “A” 6663
29/03/2019

TO FINANCIAL INSTITUTIONS:

Ref.: Circular
LISOL 1 - 826
OPRAC 1 - 970
OPASI 2 - 560

Spot transactions to be settled and forward transactions, repos, collateralized loans, other derivatives and mutual investment funds. Breaches of minimum capital requirements and technical ratios. Applicable criteria. Minimum capital requirements of financial institutions. Net global foreign currency position. Adjustments .

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We address you to inform you that this Institution adopted the resolution that, in its pertinent part, provides:

“1. Incorporate points 1.2., 3.6. and 6.1.3. into the rules on “Spot transactions to be settled and forward transactions, repos, collateralized loans, other derivatives and mutual investment funds”:

“1.2. Special limit for transactions with raw materials or basic products –“commodities”–.

The total of the transactions provided for in points 3.6. and 6.1.3. –options–, may not exceed at all times 5 % of the RPC of the corresponding institution for the previous month. For these purposes, gross positions shall be taken, which shall be computed in accordance with the provisions of points 6.5.2. and 6.6. of the rules on “Minimum capital requirements of financial institutions”.”

“3.6. Purchases and sales forward of raw materials or basic products –“commodities”–.

3.6.1. Underlying assets.

Raw materials or basic products –“commodities”– that have normal and habitual quotation in markets of the country or abroad, and price indices on them.

3.6.2. Term.

The one freely agreed upon.

3.6.3. Settlement.

They shall be settled by compensation, without delivery of the underlying, both at the maturity date and in case of unforeseen closing of positions, which must

be explicitly contemplated in the contractual termination clauses. No agreement of transactions through contracts that in any cir- cumstance admit the delivery of the underlying shall be admitted.

3.6.4. Conditions.

The transaction must be carried out:

3.6.4.1. In the country:

i) In securities markets authorized by the CNV.

ii) Outside markets: the contract must evaluate the constitution of initial margins and provide for the daily integration of variation margins.

When the institution agrees transactions with counterparties that are not financial institutions, it must be verified that they are carried out for the purpose of providing coverage to the counterparty, in terms of terms and amounts, for the price variation of products that have a reasonable relation to its activity.

3.6.4.2. Abroad:

i) In institutionalized markets of countries that are members of the Organization for Economic Cooperation and Development (OECD) that comply with the provisions of point 3.2. of the rules on “Credit evaluations” –requiring for this purpose an international risk rating of “investment grade” or higher–, that are formally authorized for such purposes, in accordance with the guarantee margins established therein.

Additionally, it must be verified that the transactions are settled through central counterparty entities (CCP).

ii) Outside institutionalized markets, under the following conditions:

a) The contract must evaluate the constitution of initial margins and provide for the daily integration of variation margins (“mark to market”).

b) The counterparty must be a foreign bank that complies with the provisions of point 3.1. of the rules on “Credit evaluations”, requiring for this purpose an international risk rating of “investment grade” or higher.

3.6.5. Policy and notification.

The participation of financial institutions in this operation must adjust to a specific policy that must be adopted by its board of directors or equivalent authority. Financial institutions must notify the Superintendency of Financial and Exchange Institutions (SEFyC), by note subscribed by the highest-ranking official of the credit or commercial area responsible for deciding on credit matters, when they begin to operate under this modality. In the pertinent presentation they shall provide information on the policy adopted in the matter including, at a minimum, the data related to underlying to consider, counterparties or markets involved, types of derivatives to be traded and levels of

responsibility for the approval of the transactions.”

“6.1.3. Options whose underlying asset is raw materials or basic products –“commodities”–.

Financial institutions may negotiate option contracts on them provided they comply with the provisions of the preceding points and point 3.6.”

2. Leave without effect point 6.2. of the rules on “Spot transactions to be settled and forward transactions, repos, collateralized loans, other derivatives and mutual investment funds”.

3. Replace the title of Section 2. and the heading iv) of point 2.1. of the rules on “Breaches of minimum capital requirements and technical ratios. Applicable criteria” with the following:

“Section 2. Excesses to technical ratios and derivative positions.”

“iv) derivative positions on raw materials or basic products –“commodities”– (in accordance with the provisions of point 1.2. of the rules on “Spot transactions to be settled and forward transactions, repos, collateralized loans, other derivatives and mutual investment funds”), and”

4. Replace the heading i) of the INC component of point 2.1. of Section 2., the second paragraph of point 6.1. and points 6.1.1.1. and 6.1.1.2. of the rules on “Minimum capital requirements of financial institutions” with the following:

“i) the excess to the limit of derivatives on raw materials or basic products –“commodities”– provided for in point 1.2. of the rules on “Spot transactions to be settled and forward transactions, repos, collateralized loans, other derivatives and mutual investment funds”;”

“The capital requirement for market risk (MR) shall be the arithmetic sum of the capital requirement for interest rate risk (IR), equity (EQ), foreign exchange (FX), commodities (CM) and options (OP).

MR = IR + EQ + FX + CM + OP”

“6.1.1.1. The risks subject to this capital requirement are the risks of positions in:

i) instruments –securities and derivatives– assigned to the trading portfolio –defined in point 6.1.2.– and;

ii) foreign currencies and “commodities”, whatever the portfolio to which they are assigned.

6.1.1.2. The capital requirement for foreign exchange and “commodities” risk shall apply to the total position in each foreign currency and “commodity”.”

5. Incorporate as points 6.5. and 6.6.3.4. (text according to this communication), and as subsection d) of section iii) of point 6.6.3.5. (text according to this communication) of the rules on “Minimum capital of financial institutions”, the following:

“6.5. Capital requirement for risk of positions in basic products –“commodities”–.

Covers the risk of maintaining positions in basic products, including precious metals except gold (dealt with in point 6.4.). For the purposes of these rules, basic product (or raw material) –“commodities”– is defined as any physical product traded or tradable in a secondary market.

6.5.1. In addition to being exposed to changes in spot prices –directional risk–, financial institutions that use “forwards” and other derivatives are exposed to the following risks:

− basis risk –risk that the relative price between similar basic products changes over time–;

− interest rate risk –risk that the cost of maintaining forward positions and options changes–;

− forward gap risk –risk that the forward price changes for reasons other than a change in interest rates–.

If, in order to finance its positions in basic products, the financial institution were exposed to interest rate and/or foreign exchange risk, it shall include the relevant positions in the computations provided for in points 6.2. –capital requirement for interest rate risk– and/or 6.4. –capital requirement for foreign exchange risk–, respectively. Likewise, when a basic product forms part of a forward contract –whether a certain quantity of that product is to be delivered or received–, any exposure to interest rate and/or foreign exchange risk arising from the other leg of the contract shall be treated in accordance with points 6.2. and 6.4., respectively.

6.5.2. Measurement of exposure.

Short and long positions may be netted for the purposes of calculating open positions, provided that they are the same basic product. Offsetting between positions in different basic products or between different subcategories of the same basic product is not permitted.

In order to calculate capital requirements, each position in a basic product (spot and forward) shall be expressed in terms of the corresponding standard unit of measure (barrels, kilograms, grams, etc.). The net position of each basic product shall be converted into pesos using its spot price and, if expressed in a foreign currency, converting it at the reference exchange rate of the US dollar published by the BCRA in force at the close of the day's operations. In the case of foreign currencies other than the US dollar, they shall be converted into this currency using the swap rates communicated by the BCRA's trading desk.

Derivative instruments –such as futures, “forwards”, “swaps” and options treated in accordance with point 6.6.3. (after applying the delta-plus method)– on basic products and off-balance-sheet positions affected by changes in the prices of basic products shall be converted into notional positions of those products in accordance with the following:

− Futures and “forwards” shall be expressed as notional quantities of barrels, kilograms, etc.

− “Swaps” in which one leg is a fixed price and the other the prevailing market price shall be treated as a long position if the financial institution pays fixed price and receives variable, and short in the opposite case.

− “Swaps” referring to different basic products may not be offset.

6.5.3. Determination of the requirement.

6.5.3.1. For directional risk: the capital requirement shall be 15 % of the net position, whether short or long, in each basic product.

6.5.3.2. For basis, interest rate and forward gap risks: financial institutions shall observe an additional capital requirement of 3 % of the gross position (long plus short) in each basic product.”

“6.6.3.4. In the case of options on basic products, the delta-weighted position shall be incorporated by the simplified method in accordance with the provisions of point 6.5.”

“d) for basic products, each individual product as provided for in point 6.5.”

7. Incorporate as the fourth paragraph of point 1.1. of the rules on “Net global foreign exchange position” the following:

“The amount of the net position of operations with raw materials or basic products –“commodities”– provided for in points 3.6. and 6.1.3. of the rules on “Spot operations to be settled and forward, repos, collateral, other derivatives and mutual funds” shall be computed within the net global foreign exchange position. For this purpose, all positions with opposite sign shall be netted regardless of whether they are different products, maturities or whether there is no legal possibility of contractual offsetting between them.”

Likewise, we inform you that we will subsequently send you the sheets that, in replacement of those previously provided, should be incorporated into the rules referred to.

We greet you attentively.

CENTRAL BANK OF THE ARGENTINE REPUBLIC

Darío C. Stefanelli
Principal Manager of Issuance and
Regulatory Applications

Agustín Torcassi
Deputy General Manager of Financial Regulation