Bulgaria: New Legal Framework For Repo Transactions And Derivatives With Pension Funds As Of 18 November 2018

Last Updated: 27 November 2018
Article by Tsvetan Krumov

The amendments provide new business opportunities to banks to enter into repo transactions and derivatives with Bulgarian pension funds.

There are various types of private social security funds (фондове за социално осигуряване) under Bulgarian law depending on the social security risks they cover. However, as the regime for derivatives and repo transactions is identical for all types of funds, no differentiation is necessary for the purposes of this paper. The term "Pension Funds" as used here thus covers all social security funds under the Bulgarian Social Security Code [Кодекс за социалното осигуряване] (the Code).

Certain amendments to the Code which will enter into force on 18 November 2018 will change the regime for derivatives and repo transactions with Bulgarian Pension Funds 1, and these will be briefly outlined below.

Existing legal framework and problems underlying repo transactions

So far there have been only two statutory restrictions on repo transactions with Pension Funds (Repos). Firstly, as Pension Funds' assets may only be invested in certain types of securities expressly listed in the Code, Repos must be for such securities only. Secondly, there is a quantitative restriction whereby Repos under the preceding sentence may be for up to 5 % of the Pension Funds' assets.

The Financial Supervision Commission (FSC), which is the authority supervising Pension Funds' activities in Bulgaria, attempted to impose certain additional restrictions to avoid the risks that Repos be used to provide long-term credits. In this respect, it published some guidelines requiring inter alia that the relevant agreement for Repos be for a period not exceeding six months. In practice, however, many Repos were entered with tacit prolongation clauses for additional six-month periods, after the expiry of each preceding six-month period. The FSC used to impose administrative penalties for such arrangements, which were normally successfully appealed before the courts. There have been more than 20 final publicly available judgments in the last couple of years repealing such penalties, arguing that the FSC had no legal power to impose additional requirements on Repos apart from those imposed under the Code.

The new framework for Repos applicable as of 18 November 2018

Under the 18 November 2018 amendments to the Code, apart from the two statutory restrictions above, Repos should comply with four additional requirements. Firstly, counterparties to Repos may only be credit institutions or investment firms with capital exceeding certain thresholds, licensed in an EEA or OECD Member State. Secondly, Repos should be for not more than six months. Thirdly, the possibility to enter into Repos must be provided for under each Pension Fund's investment policy [инвестиционна политика], the mandatory requisites of which are set out in Regulation No. 56 of the FSC. Fourthly, the Repos should comply with the investment purposes and restrictions under the investment policy of each Pension Fund.

Apart from the six-month temporary restriction and the restrictions on the types of counterparties, which may be easily monitored and verified, counterparties to Pension Funds under Repos would be well-advised to make certain checks and have in place certain representations in the Repos documentation to cover the remaining restrictions.

New derivative risks mitigation instruments available to Pension Funds

To reduce investment risks associated with Pension Funds' assets, certain transactions exhaustively listed in the Code may be used, whereby performance of the respective obligations is delayed. So far only three types of transactions were permitted: (i) deals in futures or options traded on EEA Member States' regulated markets, or other markets as specified by the FSC; (ii) foreign currency forwards (FX forwards); and (iii) interest rate swaps (IR swaps). Under the 18 November 2018 amendments to the Code, Pension Funds will also be allowed to be parties to a fourth category of risk mitigation deals: over-the-counter options 2 (OTC Options), where the counterparty is a bank supervised in an EEA Member State or in another country as specified by the FSC.

New rules for the terms and obligations with respect to derivative risk mitigation instruments

The detailed terms (including some restrictions in addition to those under the Code) for entering into risk mitigation transactions and the ongoing regulatory obligations thereof are set out in detail in Regulation No. 34 of the FSC, which has been extensively amended alongside the Code, where most of the amendments will enter into force on 19 November 2018, i.e. immediately after the amendments to the Code discussed here.

Certain restrictive rules under Regulation No. 34 applicable to IR swaps and FX forwards do not apply to the new type of derivatives that Pension Funds may use under the Code: OTC Options. In particular, Pension Funds' counterparties to IR swaps and FX forwards may be credit institutions and investment firms with a credit rating of BB/Ba2 or higher. As this restriction is not expressly applicable to OTC Options, it seems that even banks with a rating lower than BB/Ba2 may be counterparties to a Pension Fund under OTC Options.


(1) Pension Funds are legal persons, but their activities are exclusively managed by pension security companies that are separate legal entities (Pension Companies). So, both repos and derivatives may be executed only by Pension Companies acting on behalf of and for the account of Pension Funds. Banks therefore would be well-advised to make it clear that their counterparty is the respective Pension Fund, e.g. by reproducing in the documentation the statutory wording so that the Pension Company is expressly stated as executing the transaction "on behalf of and for the account of" a Pension Fund.

(2) The options (as well as the futures, referred to above) must be with respect to those securities as listed in the Code where the Pension Funds' assets may be invested.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions