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Decree 562: Mandatory investment in solidarity public debt securities - SDS

The presence of COVID-19 has meant that   the Government not only has to implement measures to control the health emergency, but also those that mitigate the impact on economic activities. Hence the importance of liquid resources for Government to face the growing needs. On this basis, the Government – by issuing Decree 562 (the "Decree") – set out a temporary mandatory investment on Solidarity Public Debt Securities named SDS (the "SDS"). In the following there are some considerations on the Decree. 

1.    What are SDS?

SDS are public debt securities. They shall be on order, freely negotiable, dematerialized and administered by the Central Bank of Colombia. They´ll have a period of 1 year counted from the moment of issuance. The period could be extended at the request of the Ministry of Finance and Public Credit.

2.    Who and how much they required to invest in SDS?

Credit entities are required to make the mandatory investment on the primary exchange market as follows: 

a.    Up to 3% of all sight’s deposits subject to cash position, previously deducted, based on financial statements reported of March 31, 2020.

b.    Up to 1% of all term deposits subject to cash position, previously deducted, based on financial statements reported of March 31, 2020. 

Decree states that the conditions of the issuance, placement, and subscription of the securities, as well as their amount, must be set out by Government.

3.    What will be the destination of invested resources?

The resources invested in SDS  will be incorporated as an additional source of resources to the Emergency Mitigation Fund – FOME (because of its acronym in Spanish) – created by Decree 444 of March 21, 2020 (See Decree 444 to check our comments about it)

4.    How should the required investment be complied? Through Which mechanism can be left evidence of such compliance?

Superintendence of Finance of Colombia has the control over compliance of the mandatory investment. Credit entities must demonstrate their compliance to the supervisory institution. Decree does not set out how the investment should be proved, so probably Superintendence of Finance of Colombia will issue a Circular Externa providing the instructions on the subject. 

5.    Final comment

In Colombia, mandatory investment has a history of many years ago. Literature reminds, for example, that, since 1948 banks had to invest 5% of their deposits in public entities such as the Agricultural Credit Fund, the Mortgage Central Bank and the Institute of Territorial Credit. Additionally, Monetary Board –created by Decree. 2206 of 1963— was empowered to regulate the cash position of banks, savings banks and could authorize them to “mantener la totalidad o parte del invertida en títulos de deuda representativos de moneda nacional o extranjera o en determinados préstamos u operaciones favorables al desarrollo de la economía nacional” (1) Invest all or part of it in representative public debt titles of domestic or foreign currency or in certain loans or operations for the development of the national economy.  (“La Junta Monetaria y el Banco de la República. 1923- 2015” Antonio Hernández Gamarra y Juliana Jaramillo Echeverry). 

Regarding the SDS, we will have to wait for the new Government decree whereby the conditions of the issuance, placement and subscription of the securities are set out, as well as the possible Circular Externa of the Superintendence of Finance of Colombia.

If you would like to deepen this information or require some advice on this, please do not hesitate to contact us. 
 

Authors

Sergio Rodríguez-Azuero
Sergio Rodríguez-Azuero
The Senior Partner
Bogotá
Nicolás-Jaramillo-CMS-Colombia
Nicolás Jaramillo
Associate
Bogotá
Eliana Jácome
Associate
Bogotá