The BCRA has streamlined the mechanism to provide sovereign bonds with greater liquidity

The Board of the BCRA has changed some of the mechanisms for exercising liquidity options. They are available for banks that have, on account of their activity, a maturity mismatch between sovereign bonds and the deposits underlying them. This option enables them to change maturities, thus reducing liquidity risks.

It has been available for banks since July 2022 with the aim of endowing the market of sovereign bonds with liquidity and making it deeper.

This security is not a guarantee, but a financial derivative instrument that gives the buyer of an option the right, but not the obligation, to sell an underlying asset within a specific time frame or at any time before the expiration date. The issuer of the option has the obligation to purchase the underlying asset under the same conditions mentioned above at a price that will depend on the market conditions. Hence, the financial institution that holds the put option must pay a premium.

The liquidity tools sold so far have hardly been exercised.

The changes made to the menu of options seek to improve the performance of the instrument after having been available for eight months, and prior to an important call for tender of the National Government's debt swap that is intended to improve its deadlines’ profile.

While this option has been in force for securities maturing in 2023, the current regulation includes those maturing in 2024 and 2025.

The purchase price on the instrument is not subject to change. It continues to be the lower between the closing price and the weighted average price traded on the business day prior to the date in which the option is exercised plus 30 basis points of an equivalent rate. However, the term of the instrument and the market are subject to change for fixing the price. As to the latter, the pricing will be based on the deepest market (volume traded).

The settlement terms are also changed: once the price is fixed, the derivative holder may exercise a liquidity option in t0, t+1 or t+2.

In addition, the BCRA will continue to intervene in the securities market for avoiding market volatility.

March 7, 2023

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