The Financial Supervision Commission has issued its first detailed statement of practice on treating repo deals/reverse repo deals with securities that are registered in the Bulgarian Central Depository.

The statement replaces all existing instructions given by the FSC on this subject, and applies with respect to:  

  • the disclosing obligations of persons having share participation in public companies;
  • the requirements for making a tender offer under the Public Offering of Securities Act;
  • the reporting obligations of persons acquiring qualified share participation in investment intermediaries, management companies of collective investment schemes and insurance companies (including health or pension insurance companies);
  • the determination of the capital adequacy and liquidity of investment intermediaries;
  • the determination of the limits of the investment amounts, which collective investment schemes and pension insurance companies can make;
  • the calculation of the limits to the amounts of the technical reserves of insurance companies and health insurance companies, which can be subject to investment.

Any of these statutory requirements and obligations will be treated as having been complied with where the acquisition of securities is made under a repo or reverse repo deal on the following terms:

  1. There is an unconditional and non-waivable undertaking for the buy back of the securities subject to the deal and a provision that the buy back is to be made on a date and at a price specified in advance;
  2. There is an agreement that the voting rights on the transferred securities will remain with the transferor;
  3. There is an undertaking that, for the duration of the repo or reverse repo agreement, the transferee of the securities must not dispose of the securities (by way of transfer or pledge) before the transferor has exercised its buy-back right/obligation, or the deadline for the buy back has expired;
  4. The repo deal/reverse repo deal is at a value not exceeding 70% of the market value of the transferred securities, such market value being calculated as at the date the agreement is signed;
  5. The term of the repo/reverse repo agreement does not exceed 6 months;
  6. The repo/reverse repo agreement provides for additional collateral where the market value of the transferred securities falls below 30% of their market value as at the date the agreement is signed;
  7. There is a provision that the non-defaulting party will acquire the securities transferred under the repo/reverse repo agreement if the defaulting party does not comply with the terms and conditions of the agreement (which should then be treated as an agreement for the sale and purchase of securities).

The statement of practice also specifies that all repo/reverse repo agreements must include:

  • An unconditional and non-waivable undertaking to buy back the securities subject to the deal and a provision that the buy back is to be made on a date and at a price specified in advance;
  • Information about the securities subject to the deal, including the number, unit price, ISIN code and discount (not less than 30% of market value, calculated as the closing price on the day before the signing date of the repo/reverse repo agreement);
  • Information about the agreement itself, including the settlement and buy-back dates, the term, the expenses and costs of the deal (including the calculation method) and the interest rate, period and payment mechanism;
  • A provision arranging the exercise of voting rights on the securities by the transferor;
  • A provision determining the beneficiary of the right to receive a dividend from the securities and the mechanism for payment of such dividends;
  • A provision dealing with the performance of any rights deriving from the securities, including the transferee’s participation in a procedure for capital increase;
  • A requirement for providing additional security where the market value of the transferred securities falls below 30% of their market value at the signing date (ie their closing price on the day before signing);
  • The terms and conditions for the non-defaulting party to be satisfied where the other party has failed to perform its obligations under the repo/reverse repo agreement either on time or at all;
  • The terms and conditions for acquiring the securities if the terms and conditions of the repo/reverse repo agreement have been breached;
  • The restrictions on disposing of the securities (by transfer or pledge) before the right or obligation to buy back the securities has been exercised under the repo/reverse repo agreement or the deadline for doing so has expired.

Other requirements of the statement of practice include:

  • The parties lodging a copy of any repo/reverse repo agreement with the FSC;
  • The supervised entity ensuring the repo/reverse repo deal is reflected in its financial statements (including reflecting any acquisition of securities under a reverse repo agreement as a receivable and derivative, and reflecting an undertaking to buy back the securities as collateral securities);
  • Maintaining a separate register of repo/reverse repo deals with the Central Depository (due to be implemented in October 2012 having initially been planned for March 2012).