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Argentina Derivatives Update

OTC Latin America PanelDerivatives and Risk Management

in Mexico - ISDA ConferenceMay 8th, 2001

J. Andrew Hall - CommissionerSecurities & Exchange Commission

Buenos Aires, Argentina Email: jah@mecon.gov.ar

Tel.: 54-11/4345-2876Web: www.cnv.gov.ar

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Contents

• A Customer Daily Quote Sheet, for Motivation!• Required Infrastructure and Status• Regulatory Framework• Knowledge Management• Basic Products• Potential Clients and Uses• A Questionnaire-Survey• The “To Do” List• Resources

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An ARGENTINE DERIVATIVES Daily Customer Quote Sheet !!!

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• Term Structure of Interest Rates, July 1998.(USD, Argen-Dollar, Argentine Peso)

An ARGENTINE DERIVATIVES Daily Customer Quote Sheet !!!

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An ARGENTINE DERIVATIVES Daily Customer Quote Sheet !!!

• Argen-Dollar Interest Rate Swaps(Floating 1 Month BAIBOR Vs. Fixed Rate)

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An ARGENTINE DERIVATIVES Daily Customer Quote Sheet !!!

• Argentine Peso Interest Rate Swaps(Floating 1 Month BAIBOR Vs. Fixed Rate)

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An ARGENTINE DERIVATIVES Daily Customer Quote Sheet !!!

• USD-Argentine Peso Cross-Currency Swaps(Fixed Pesos vs. 1 Month USD LIBOR)

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Required Infrastructure (and Status):

• Legal• Tax• Accounting• Financial Engineering and Operational

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Required Infrastructure (and Status):Legal (I)

• Currently, argentine bankruptcy law does NOT allow netting and margining to take place, EXCEPT in the case of the Federal Government as a counterparty.

• Thirty-some countries have already modified their Bankruptcy Laws to allow ISDA-style Master Agreement netting and margining, including Spain, Italy, France and Germany, jurisdictions traditionally dear to the argentine legal community for jurisprudence.

• The Argentine Securities & Exchange Commission is sponsoring a Bankruptcy Law Reform Project for Derivatives to permit netting and margining for transactions booked under a master agreement.

• The Bankruptcy Law Reform Project, once enacted, will merit clean netting and margining opinions, according to Cravath, Swaine & Moore, legal counsel to ISDA.

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Required Infrastructure (and Status):Legal (II)

• The Argentine Bankruptcy Law Reform Project has the support/approval of:– The Senate (Sanctioned in November 2000)– The Ministry of Economy– The Ministry of Justice– The Central Bank– The Buenos Aires Stock Exchange (Bolsa)– The Buenos Aires Securities Market (MerVal)– The Argentine Banking Association– ISDA - International Swaps & Derivatives Association– EMTA - Emerging Markets Association

• The Argentine Bankruptcy Law Reform Project is currently pending final approval by the Congress (Cámara de Diputados), and...

• Needs YOUR support !!

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Required Infrastructure (and Status):Tax

• Decree 1130/97• An important milestone concerning the taxation of

Derivatives in Argentina• Significantly reduces taxation uncertainty of

Derivatives.• According to the IFA – International Fiscal

Association, taxation of derivatives ought to be economically neutral.

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Required Infrastructure (and Status):Accounting

• Informe Area Contabilidad Nº 17 Argentine Accounting Standards Board (Federación Argentina del Consejo de Profesionales)

• A modern, voluntary framework for derivatives accounting

• Based on IASC – International Accounting Standards Committee Rule Nº 32

• Since November 1995• Final, mandatory accounting framework by

IVQ2001

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Required Infrastructure (and Status):Financial Engineering and Operational

• LIBOR-style Floating Rate Index (BAIBOR, Available!)• Non-Callable Government Bills and Bonds to build a

Zero-Coupon Curve (BonTes and LeTes, Available!)• Electronic Trading Systems (MerVal SINAC and M.A.E.

SIOPEL, Available!)• Money Transfer System (FedWire-style Central Bank

MEP, Operational!)• Internationally well-connected communications networks

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Regulatory Framework

• Argentina permits the free flow of capital• Central Bank implements Basle Capital Adequacy

Standards according to Interest Rate VAR• Argentine Securities and Exchange Commission

regulates futures exchanges (Regulation Nº 337 of 1999, based on the U.S. Futures Industry Association’s Global Task Force’s Financial Integrity Recommendations)

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Knowledge Management

• Need for potential future competitors to cooperate in workgroups (“co-opetition”) to create the market they will later compete in

• Training and Marketing are KEY to developing Argenmtina’s derivatives markets

• For international banks, Head Office is a source of:– Experience– Initial staffing for local operations– Back-Office Technology for risk management and processing

transactions• Customers must be educated and marketed before they will

enter the Risk Management Business

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Initially, the Basic Products!

• FRA – Forward Rate Agreement• Interest Rate and Currency Swaps• Caps, Floors, Swaptions• Interest Rate and Government T-Bill and

Bond Futures• The customer quote sheet shown is an

example of what is already being done!

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Potential Argentina Target Clients and Derivatives Uses

• Commercial Banks (ALM-Asset and Liability Management, Reducing Imputed Capital)

• Investment Banks (Structured Note Issues)• Commercial and Industrial Companies (Bond

hedges, interest rate, exchange rate and commodity price risk management)

• Insurance Companies (synthetic long term assets)• Pension Funds, Mutual Funds, Money Market

Funds (interest rate and equity risk management products)

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A Survey for You!• Are you interested in the development of financial derivatives

for Argentina? Is your interest a career play?• Do you believe it’s possible to develop financial derivatives

markets in Argentina?• Is it likely? This year? In 5 years? In 10+?• Do you have a client in Argentina that could benefit from

derivatives and risk management? Do you have 5? Or 10+?• If you work for a foreign financial institution, does your Head

Office trade derivatives?• If yes, could your Head Office provide you with information

on the development of financial derivatives markets in comparable (Brazil, Spain, Italy, Australia) jurisdictions and help you develop a Business Plan?

• Would you be willing to join a team to develop Argentina´s derivatives markets?

• Would you participate in an ISDA Survey on this subject?

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Your “To Do” List...• Organize marketing and educational conferences for your

clients• Survey your clients’ risk management situation and needs• Use the BAIBOR Floating Rate Index for your floating rate

operations• Analize the VaR inherent in your Balance Sheet and how

you could reduce this risk, and BIS Imputed Capital, with the aid of FRAs.

• Contact your Head Office Derivatives Team and develop a Business Plan

• Support the Bankruptcy Law Reform and contact your Congressman

• Support ISDA both financially and with your valuable time and expertise

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Resources...• For Institutional Support...

ISDA (www.isda.org), andADA – Argentine Derivatives Association (www.ada.org.ar)

• For Professional Development...GARP – Global Association of Risk-Management Professionals (www.garp.com)

• Build your Library...(Search www.amazon.com Books for “derivatives” - 765 items! – or “Risk Management” – 1,487 items!, most popular always listed first)

• Search the Web...(The www.google.com search engine finds 7,300 pages with the keywords “derivatives risk management argentina”)

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It´s Your Market!

It´s Your Future!

Rise to the Challenge!

Get I-n-v-o-l-v-e-d!