Recent changes in Peruvian insolvency laws1 will now allow financial institutions and insurance company counterparties to close-out and net obligations under derivatives and repurchase agreements with Peruvian financial institutions or insurance companies which become subject to bankruptcy proceedings. The Banking, Insurance and Investments Regulator2 in Peru (the “Superintendent”) recently issued regulations under Circular No G-142-2009, published in the Diario Oficial “El Peruano” on June 1, 2009 (the “Circular”), which became effective June 4, 2009, setting forth the requirements and conditions of netting payment obligations in the event of a bankruptcy by a Peruvian counterparty.
Requirements and Guidance for Netting Under the Peruvian Insolvency Regime
Requirements set forth in the Superintendent’s Circular are as follows:
- both counterparties must be either a financial institution or an insurance company, as defined under applicable law of the relevant jurisdiction of incorporation of each counterparty (“Qualifying Counterparties”);
- with respect to the scope of bankruptcy proceedings, the Peruvian counterparty must have become subject to an intervention by the Superintendent or dissolution and liquidation (henceforth referred to as “Bankruptcy Proceedings”);
- such payment obligations must be incurred pursuant to (1) an agreement in a form approved by the Superintendent (currently, such approved form agreements under the Circular are: (a) a “Master Repurchase Agreement” or a “Global Master Repurchase Agreement” published by The Bond Market Association (“BMA”) or the International Securities Market Association (“ISMA”) or (b) an “ISDA Master Agreement” published by the International Swaps and Derivatives Association (“ISDA”)) and (2) which includes the following provisions: events of default, termination events with the ability to terminate all transactions thereunder, close-out calculation methods, single agreement, amendment upon consent of both counterparties, governing law and jurisdiction or other dispute mechanisms (the BMA, ISMA and ISDA Agreements comply with this requirement); and
- a copy of the executed agreement must be filed with the office of the Superintendent before the commencement of any Bankruptcy Proceeding.
In bringing about the new netting regime, the Circular unfortunately does not address all details of its implementation.
Guidance for Form Approved Agreements.
First, the Circular does not provide guidance on repurchase or derivatives agreements that are not executed on the preapproved form agreements published by BMA, ISMA or ISDA. While the Superintendent may approve agreements in addition to those pre-approved, the Circular is not clear as to whether the Superintendent is likely to approve and apply the new netting regime if the parties executed a local master agreement, a form agreement of another association or an individually negotiated master agreement which includes the required contract provisions. If you otherwise qualify for netting under the requirements prescribed by the Circular, but have documented the transaction on an agreement that has not been pre-approved by the Superintendent, we would recommend that the parties submit the agreement for prior approval by the Superintendent before filing the agreement.
Guidance for Filing Requirements.
Second, the filing requirement is vague as to (1) the timing of the filing and (2) the nature of documentation and disclosure to be filed. With respect to timing, generally a Bankruptcy Proceeding commences upon its public announcement. Thus, we would recommend all filings to occur before the public announcement by the Superintendent that such financial institution or insurance company has become the subject of a Bankruptcy Proceeding. Unfortunately, any prior actions by the Superintendent aimed at bringing the institution back to stability through restructuring and avoiding bankruptcy are not public and counterparties will not be aware that a Peruvian counterparty risks being subject to Bankruptcy Proceedings. In all events, Qualifying Counterparties should promptly file any and all of their outstanding trades (as further described below) with the office of the Superintendent.
With respect to the nature of documents and type of disclosure to be filed, until further guidance and clarity is obtained from the Superintendent we recommend the following: (1) for derivatives agreements, we recommend filing the ISDA Master Agreement, Schedule, any applicable credit support annex and all related trade confirmations or other form agreement documenting a transaction under the ISDA Master Agreement as well as all subsequent amendments, modifications or supplements, and (2) for repurchase agreements, we recommend filing the Global Master Repurchase Agreement or Master Repurchase Agreement, all related financing documents governing such transaction as well as all subsequent amendments, modifications or supplements. If such trades are not documented on forms already approved by the Superintendent, we recommend first filing such agreement and all related amendments, modifications or supplements for prior approval and seeking guidance if necessary with respect to future filings. Counterparties should be guided by the principle that the Superintendent is seeking full disclosure on all outstanding obligations which may be subject to netting and the amounts of payments subject to such netting. Unless such documents are filed with the office of the Superintendent, a counterparty runs the risk of not being able to benefit from netting in the event of a bankruptcy of the Peruvian counterparty.
Recommendations for Existing and Future Agreements Among Qualifying Counterparties
In order to ensure the timely and proper filing of future derivatives agreements, we would recommend that parties include in their agreements a standard delivery requirement obligating parties to promptly file the form-approved master agreement and related documents as well as amendments, modifications or supplements (including all trade confirmations) upon their execution and delivery as well as provide a proof of filing. This requirement should be on-going throughout the life of the trading relationship or repurchase agreement to ensure that at all times the filings with the Superintendent show the current and existing obligations of the counterparties. Parties may also want to consider including (1) an additional termination right upon a failure by a counterparty to (a) promptly file the agreement and related documents or (b) provide a proof of filing and (2) an additional representation that the agreement has satisfied all of the obligations for netting in the event of a Bankruptcy Proceeding. Parties should also require pre-approval of the agreement if it is on a form other than one published by BMA, ISMA or ISDA.
For existing agreements among Peruvian counterparties with outstanding trades, counterparties will need to promptly file the pertinent documents. Counterparties should also consider amending their respective agreements to include delivery and filing obligations of such agreements and related trade confirmations as discussed above.
Limitations of Netting Under the Peruvian Insolvency Regime
While counterparties in transactions with Peruvian corporate institutions (“Corporates”) will not be able to benefit from the new netting rights under the Peruvian insolvency laws, the Peruvian legislature has discussed extending such benefits to Corporates in the future. Despite such limitation on Corporates, the changes introduced by the Circular mark an important step forward in the standardization of the market and increasing market confidence and transparency in the derivatives space.