In August 2016, the Argentine Central Bank (the "Central Bank") introduced significant changes in the foreign exchange regulations of derivatives by eliminating the restriction on the execution of cross-border derivative transactions. As a result, the foreign exchange regulations now allow Argentine residents to enter into derivative transaction with foreign counterparties without the need of Central Bank authorization. They also allow them to purchase foreign currency to make payments under derivative transactions. The only restriction outstanding under foreign exchange regulations for derivative transactions with foreign residents are for those which could be construed as foreign exchange transactions (e.g. FX forwards). Now, the Central Bank has issued risk management regulations which apply to certain derivative transactions which are construed as foreign exchange transactions.
The Central Bank issued "Guidelines for the Settlement of Foreign Exchange Transactions" (the "Guidelines"). The Guidelines regulate the risk management by financial institutions of the exposure resulting from foreign exchange transactions, from their negotiation to their final settlement. The financial institutions must implement the Guidelines in a manner proportional to their size, nature, complexity and risk profile in the foreign exchange activities and manage the risks associated to it in a manner similar to the management of equivalent risks generated by the other activities, but having into consideration the specific aspects of such transactions.
The Guidelines provide that the financial institutions must have a solid governance, with mechanisms that assure that all risks related to the settlement of the foreign exchange transactions are identified, measures followed and controlled on a consolidated basis, within the framework of a process of integral risk management and with active commitment of the Board of Directors.
The Guidelines define the foreign exchange transactions subjected to them. In addition to spot transactions, the Guidelines apply to certain derivative transactions. Those derivative transactions are the ones settled by two cash flows, such as forwards, options with delivery of the underlying currency, FX swaps and currency swaps in which there is an exchange of the notional amount.
The Guidelines include definitions of certain foreign exchange derivatives:
- Foreign Exchange Forward: is the agreement between two parties which agree to buy or sell one currency against another at a future date (more than two days) at a price agreed at the time of entering into the agreement.
- Foreign Exchange Swap: is the agreement in which the parties agree to simultaneously buy or sell a currency for another, at an agreed exchange rate, and repurchase or resale it to the same counterparty on a future date, at an agreed price.
- Currency Swap: is the agreement between two parties to exchange certain concepts (principal and/or interest) of a loan in one currency for the same concepts under a loan in another currency at a specified future date, according to an agreed formula. Generally these agreements involve the exchange of principal and are known as "cross currency" swaps.
The Guidelines do not apply to those instruments which involve only one payment, such as non- deliverable forwards (NDFs), cash settled options, and agreements settled by differences.
The Central Bank has recently introduced regulations on the capacity of the financial institutions to enter into derivative transactions. The Guidelines are an addition to the regulations of derivatives entered into by financial institution by including detail risk management regulations. At a more general level, the Guidelines may also provide some insight on the type of derivatives that the Central Bank deems to be foreign exchange transactions.
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.