2023-05-17 07:27:28
Wednesday, May 17, 2023
The Banco de la República modified and added the regulation on derivatives, in order to allow residents to enter into credit derivatives, and to adjust the definition of foreign agents authorized for said operations, through External Resolution No. 10 of 2022, which modified External Resolution No. 1 of 2018, and the External Regulatory Circular – DOAM- 144 of January 5, 2023.
Credit derivatives are financial instruments that allow those who enter into them to manage and transfer credit risk, that is, the risk of incurring losses as a result of a debtor or counterparty defaulting on its obligations. These instruments are relevant in the financial and securities markets, since they allow credit risk to be transferred to third parties with greater capacity or knowledge to manage it properly.
This contributes to the overall reduction of risk in the market, and, in turn, may result in an increase in the capital available in the market, by allowing participants to have a greater incentive to lend money or acquire debt instruments. On the other hand, credit derivatives are relevant because they can be used as mechanisms to assess the credit risk of a counterparty, through verification of the price of the credit derivative used to manage its risk.
Prior to the modifications made by Banco de la República, in Colombia only the entities supervised by the Financial Superintendence were authorized to enter into certain credit derivative operations – Credit Default Swaps, which are used to hedge the risk of non-compliance of credit instruments. debt. Now, as a result of the regulatory changes described, not only supervised entities can enter into credit derivatives, but all residents, with the only limitation that credit derivatives cannot be issued by them.
In addition, the amendment removes the restriction on the type of credit derivatives that can be entered into, and as a consequence, residents can enter into all types of credit derivatives, including Credit Spread Options, and Total Return Swaps. Lastly, the new regulation included the investment grade qualification requirement for foreign agents that enter into credit derivatives with residents.
In compliance with the regulations issued by the Banco de la República, the Financial Superintendence, through External Circular 001 of 2023, gave instructions to the supervised entities regarding the credit derivatives that they can enter into, and particularly, on how to account for the risks derived from said operations, for which, among others, it made changes in Chapters XVIII (Derivative financial instruments and structured products) and XXXI (Integral Risk Management System – SIAR) of the Basic Accounting and Financial Circular.
These regulatory changes come at a crucial moment, in which the financial market needs effective mechanisms to manage its risks due to the situation of the local and international economy. In addition, they open a window of possibilities for residents (including supervised entities), and for authorized foreign agents, who will be able to take advantage of the new regulation to offer new types of derivatives to their Colombian clients.
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