/ Quasi-equity: new investment instrument for AFP and insurance companies7 March, 2019
Law No. 21,130, which modernizes banking legislation, also incorporates amendments to Decree Law 3500 (Pension Funds Managers Act) and to Law-ranking Decree 251 (Insurance Law), by incorporating a new investment instrument for said entities that may be issued by banks – Quasi-equity.
As it has been visualized, Law No. 21,130 not only modernized banking legislation, but also brought with it the amendment of other legal bodies of major importance for the Financial Market.
One of the amendments of this Law to the General Banking Law, entitles banking companies to issue, prior authorization from the Chilean securities and insurance regulator (and also future banking regulator), Comisión para el Mercado Financiero (“Commission” or “CMF”), bonds with no fixed maturity term, which may qualify as part of the effective equity of the issuing bank and known as quasi-equity.
Although the Law states that it will be the Commission who will establish, by means of a general applicability rule, prior favorable resolution from the Chilean Central Bank, the requirements and conditions that such instrument must meet, the same law gives certain guidelines regarding the characteristics that must be considered for purposes of enacting such regulation.
Thus, it states that such bonds must be issued without a fixed maturity term for the amortization of the principal, adding that the amortization of the principal can only occur through the advance payment or voluntary redemption of the issuing bank. Likewise, the Law establishes that this type of bonds, for all legal purposes, shall be deemed a public offering debt instrument.
The creation of this instrument has not only intended to benefit banks in that it may be considered as part of the issuing bank’s effective equity, but also sought to expand the catalogue of instruments in which Pension Funds and Insurance Companies may invest their funds.
Article 45(b) of Decree Law 3500 states that pension fund assets may be invested in term deposits, bonds and other securities representing deposits issued by financial institutions. Thus, the bond incorporated into the General Banking Law is included in the catalogue of permitted investments for pension funds.
The express inclusion of such instrument occurs through the incorporation of a number ten to the list of instruments or operations for which the Investment Regime (regulation issued by the pension regulator, Superintendencia de Pensiones (“SP”)) must establish investment limits, stating that with respect to bonds without fixed maturity issued by banking companies, the limit may not exceed 5% of the value of the Pension Fund, for each A, B, C, D and E Class Fund.
The same applies to the Insurance Law, Article 21 of which states that the technical reserves and regulatory capital of insurance and reinsurance entities must be backed by investments made in the instruments and assets indicated therein, including in paragraph b) the bonds with no fixed maturity, as described in the General Banking Law.
The Commission is given the task of establishing, by means of a general applicability rule, the limits, terms, requirements, characteristics, rules and procedures that must be complied with in order to be representative of technical reserves and regulatory capital, providing as a guideline, on the one hand, that the investment limit per instrument will be between 5% and 10% of the total for bonds with no fixed maturity term and, on the other hand, that the diversification limit per issue, for investments that support technical reserves and regulatory capital, may be established by the Commission in a range between 20% and 30% for bonds with no fixed maturity term.
The amended statutes, as it is possible to understand, will now require the corresponding regulatory amendments by the relevant regulators to make effective the incorporation of this new bond in both the catalogue of investment instruments allowed for pension funds, as well as in the list of investments that can support the technical reserves and regulatory capital of an insurance company.
First, the CMF (to be merged with the banking regulator) will be required to issue a general applicability rule governing the requirements and conditions to be met by the bond. And then, the amendment to the Investment Regime by the SP and of General Applicability Rule No. 152 regulating insurance company investments, by the CMF.
Therefore, there is still a long way to go to determine what the advantages that investment in such instrument may bring to pension funds and insurance companies will ultimately be.