The Central Bank opens the Argentine derivatives market to foreign dealers
December 2016 | EXPERT BRIEFING | BANKING & FINANCE
The Argentine Central Bank has introduced significant changes to the foreign exchange regulations of derivatives by eliminating the restriction on the execution of cross-border derivative transactions.
In 2003, the Central Bank introduced foreign exchange regulations that prohibited Argentine residents from entering into derivative transactions with foreign residents unless such transactions were expressly authorised by the Central Bank. This prohibition applied whether or not the resident accessed the foreign exchange market in connection with the transaction. Derivative transactions were the only type of transaction that needed the Central Bank´s authorisation for its execution, even if there were no foreign exchange transactions involved.
The derivative transactions that residents could enter into with foreign residents without a specific additional authorisation from the Central Bank were, mainly, derivative transactions entered into under Argentine law and cash settled in Pesos in Argentina and certain hedging transactions, mainly to hedge commodity prices and currency risk related to foreign trade transactions or interest rate and currency risk related to external financing.
The Central Bank regulations not only restricted the type of derivatives that a local resident could enter into with foreign residents. The regulations also limited the type of foreign residents with whom local residents could enter into a derivative transaction which involved access to the foreign exchange markets. The main types of authorised counterparties were financial institutions and institutional markets, however, parent companies and subsidiaries were not considered authorised counterparties. As a result, a local company could enter into a derivative transaction with its parent company, if it was one of the authorised types of transaction, but it could not transfer funds through the foreign exchange market to make the payments under such a derivative. The local company had to use its freely available funds, which was impracticable.
The effect, and probably the aim, of the regulation was to prevent foreign bank and dealers from gaining access to the Argentine derivatives market. Foreign banks and dealers were limited to transactions hedging certain specific risks – interest rate, commodity prices, etc. – related to foreign financing and foreign trade transactions which were not the most attractive markets. The regulations expressly prohibited cross-border derivative transaction in which the local resident was hedging the Argentine peso against another currency, which was the largest derivative market in Argentina due to the constant devaluation risk that Argentine residents faced. In theory, foreign banks and dealers could enter into derivatives if governed by Argentine law and settled in pesos in Argentina. However, even if they were willing to subject the transaction to Argentine law, there were restrictions on the inflow and outflow of funds to Argentina that made the trade impracticable. Therefore, the most important and active market for Argentine residents was closed to them.
In August 2016, the Central Bank introduced new foreign exchange regulations on derivative transactions which did not prohibit local residents from entering into derivative transactions with foreign residents. Moreover, the regulations now provide that Argentine residents may access to the foreign exchange market to pay premiums, post collateral, and make payments related to forwards, futures, options and other derivatives entered into in foreign exchanges or with non-resident counterparties.
This change in the general rule – from one in which residents could not enter into derivative transactions with foreign counterparties to one in which they can – is part of a major loosening of the foreign exchange regulations that started in December 2015 with the new administration. The only restriction outstanding under foreign exchange regulations for derivative transactions with foreign residents are for those transactions which could be construed themselves as foreign exchange transactions (fx forwards, for example).
The Argentine derivative market is now open to foreign banks and dealers. The foreign exchange regulations now allow Argentine residents to enter into derivative transaction with foreign counterparties without the need for Central Bank authorisation. They also allow them to purchase foreign currency to make payments under derivative transactions. This will allow creating a peso-dollar NDF market with settlement outside Argentina. The opening of the derivative market is part of a more welcoming approach to foreign participants taken by the current administration and may provide opportunities for foreign banks and dealers to enter the Argentine derivatives market after more than a decade of absence.
Pablo J. Gayol is a partner at Marval, O’Farrell & Mairal. He can be contacted on +54 11 4310 0100 or by email: email@example.com.
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Pablo J. Gayol
Marval, O’Farrell & Mairal