Argentina: Mutual Fund Suspensions, 2019

Facing a liquidity crisis and collapse in demand for Argentine government debt, President Mauricio Macri’s administration announced on Wednesday, August 28, 2019, that it would unilaterally extend the maturity for USD 7 billion of sovereign short-term debt held locally and seek an extension on other long-term debt, totaling USD 101 billion. The government extended the maturity on four types of short-term Treasury bills: peso-denominated bills that pay compounded interest on maturity (LECAPs), peso-denominated, inflation-indexed bills (LECERs), US-dollar-denominated bills (LETEs), and peso-denominated bills that are linked to the dollar-peso exchange rate, offering protection against peso depreciation (LELINKs). The specific short-term debt securities subject to the reprofiling were listed in the annex to the decree announcing the rescheduling (Argentina 2019a; BCRA 2019b; Doll, Gilbert, and Oyamada 2019).

The decree outlined the new repayment terms for most types of bills as:

• 15% of the nominal value would be repaid per the original maturity;
• 25% of the nominal value would be repaid three months after the original maturity;
• The remaining 60% would be repaid six months after the original maturity of the respective debt security.

The decree imposed slightly different terms for LECAPs that were set to mature on or after January 1, 2020. For these bills, the payment on the maturity date would be 15% of the amount due, with the balance payable 90 days after the original maturity date (Argentina 2019b).

However, the decree specified that the restructuring would not apply to owners of the securities registered as individual investors at Argentina’s Central Securities Depository (Caja de Valores) as of July 31, 2019, if they maintained ownership as of the payment date. The CNV clarified the next day, on Thursday, August 29, that individual investors who had invested in the affected securities indirectly, through investments in mutual funds that held the securities, would be treated the same as individual investors who had invested directly and therefore not been subject to the extension (Argentina 2019b; CNV 2019b).

The varying repayment terms of the restructured Argentine securities created operational issues for mutual funds, which lacked a mechanism to apply different prices to the same securities for the benefit of individual investors, depending on when they bought into the fund (Fitch Ratings 2019b).

Following the government’s announcement, on August 29, 2019, the mutual fund industry in Argentina experienced severe redemption pressures, and many funds gated to halt redemptions. The CAFCI held meetings Wednesday night, August 28, and Thursday, August 29, to coordinate an industrywide suspension of redemption rights, so that pricing and liquidity issues associated with the redemption activity could be mitigated (Fitch Ratings 2019b).

The CAFCI also sought tools for the mutual fund industry to be able to provide individual investors with the same treatment outlined in the decree announcing the rescheduling. Fitch Ratings argued that the mutual fund industry in Argentina had little choice but to suspend redemption rights for all investors given these issues, until fund managers, administrators, and regulators determined an equitable and operationally compliant way to honor redemptions (CE NoticiasFinancieras 2019a; Fitch Ratings 2019b).  

Most money market funds remained open, and investors withdrew ARS 70 billion (USD 1.2 billion) from these funds that day, representing 10% of the entire mutual fund industry’s assets (CAFCI 2019; Doll, Gilbert, and Oyamada 2019).

On August 29, 2019, the CNV adopted General Resolution 806 to provide funds with the mechanisms to group assets by liquidity and investor type in order to comply with the rescheduling  (CNV 2019a).

The next day, following the redemption pressures and widespread gating in Argentina’s open-end mutual fund industry, the BCRA announced that it would launch two facilities to provide liquidity that mutual funds could use in turn to meet redemptions. On August 30, the BCRA announced plans to purchase from only mutual funds the four types of short-term public debt securities affected by the government’s rescheduling; purchases were made through financial institutions. The BCRA also announced in the same press release that it planned to offer auctions of active repurchase agreements in pesos and US dollars using the same collateral, again allowing only mutual funds to participate in these auctions. Through these mechanisms, the BCRA purchased roughly ARS 47 billion worth of bills from mutual funds through October 11, 2019 (BCRA 2019a; BCRA 2019b; BCRA 2019d).

The BCRA also took steps to promote liquidity in money market funds. In a separate press release on August 30, the BCRA authorized money market mutual funds to cancel the terms of fixed deposits and other term investments in banks so that they could meet investor redemption requests. This ruling applied to deposits or investments that were at least seven days old and remained in effect through September 30. On September 16, 2019, the BCRA also announced that the Monetary Policy Committee raised the interest rate applicable to its reverse repo transactions with money market mutual funds to 70% of the one-day repo transaction rate applicable to financial institutions. Effectively, this measure increased the annual interest rate that money market funds received from the central bank on the reverse repo program from 0.5% to about 45%. As a result, money market mutual funds shifted about ARS 70 billion into the BCRA’s reverse repos, representing about 14% of the total net worth of money market mutual funds, and fixed-income mutual funds shifted about 15% of their net worth into money market mutual funds (BCRA 2019a; BCRA 2019d; BCRA 2019e; CE NoticiasFinancieras 2019c). For a breakdown of changes in the composition of equity for Argentine mutual funds from August to September 2019, see Figure 2 below.

The BCRA explained the purpose of these programs:  

In short, by means of auctions for the purchase of Bills, the BCRA pumped liquidity to Mutual Funds so that they could face the increase in the number of redemptions by holders of unit shares, while the increase in the rate of the Mutual Funds’ reverse repos improved the transmission channel of the interest rate in order to make the remuneration obtained by money market Mutual Funds more appealing. Thus, the measures adopted by the Central Bank of Argentina contributed to stabilizing the Mutual Funds market and preserving financial stability (BCRA 2019d, 80–81).

The BCRA’s 2019 annual report indicates that as of year-end the central bank held approximately USD 36.5 million worth of short-term debt securities (original nominal value) in relation to providing liquidity to the mutual funds (BCRA 2019e).

Capital Controls

Shortly after the government announced the rescheduling of short-term government debt, the foreign exchange value of the peso and Argentina’s foreign exchange reserves fell sharply. The government imposed capital control measures on September 1, 2009, requiring exporters to repatriate earnings within five to 15 days, and ruling that businesses would need permission to transfer profits abroad or purchase dollars. The government also announced a monthly limit on foreign exchange transactions of USD 10,000 for residents and USD 1,000 for nonresidents (Johnson 2019).

On August 28, 2019, the president of Argentina in general agreement of its ministers decreed the rescheduling of USD 7 billion of sovereign short-term term debt held domestically (Argentina 2019b). The affecting decree, No. 596/2019-Public debt, was issued pursuant to the president’s emergency executive powers under Section 99, Subsections 1–3 of the National Constitution that provide in part:

Only when due to exceptional circumstances the ordinary procedures foreseen by this Constitution for the enactment of laws are impossible to be followed, and when rules are not referred to [specified issues] . . . he shall issue decrees on grounds of necessity and urgency, which shall be decided by a general agreement of ministers who shall countersign them together with the Chief of the Ministerial Cabinet (Argentina 1853, 16).

The “exceptional circumstances” relied on by the president as referenced in Decree 596/2019 was the “state of uncertainty in the financial markets, evidenced by the pronounced and sustained fall in the trading prices of national public debt securities.” Per the decree, this made it “urgent and necessary to create a framework for the sustainability of the short-term public debt” (Argentina 2019a, 596; Argentina 2019b).

The president’s decree was subject to review by the Joint Standing Committee of Congress within a period of no longer than 10 days, and the committee was required to discuss its report with each house of Congress (Argentina 1853).

Following this decree, the CNV adopted General Resolution 806/2019 to give mutual funds the necessary tools to group assets based on their liquidity and type of investor in order to comply with the extension and specifically the exemption of individual investors. The general resolution directed funds to pay assets in proportion to each individual’s holdings in a fund, permitted paying certain assets in kind, and required certain reporting to the CNV.  The general resolution also stated that the CNV exercised its powers under Sections 22 and 32 of Law No. 24,083 and Section 19, subsections (h) and (u), of Law No. 26,831, to issue the resolution (CNV 2019a).

Specifically, Law No. 24,083 establishes the legal regime for mutual funds in Argentina and Section 22 provides generally that redemption requests must be paid within three days.  The section also provides that “management regulations” may establish redemption periods longer that three days (Argentina 1992, art. 22). Section 32 of Law No. 24,083 establishes the CNV as the supervisor for mutual funds (Argentina 1992, art. 32).

The CAFCI^FNThe CAFCI represents the interests of the Argentinean mutual funds and asset management industry. It had 55 members managing more than USD 16.8 billion distributed in 565 open-end and closed-end mutual funds as of mid-October 2019. The CAFCI works in collaboration with the national government (Contify Investment News 2019). is the main private association of mutual funds and asset managers and serves as the point of contact for the government on all issues related to mutual funds. It called a meeting on August 29 of all fund managers in Argentina after the government announced the rescheduling and coordinated a temporary industry-wide gating in response to the wave of redemptions. The CAFCI did this to mitigate issues with pricing and liquidity under the redemption pressures and operational issues with establishing different pricing for the same securities, based on the type of investor and date of purchase (CE NoticiasFinancieras 2019a; Fitch Ratings 2019b).

Fund managers, administrators, and regulators worked towards finding an equitable and operationally compliant way to honor redemptions following the government’s announcement of the debt rescheduling and the exemption for domestic retail investors. Law No. 26,831 provides rules governing the Argentine capital markets, and under article 19 of that law the CNV is given the power to establish any necessary regulations to “settle any issues not contemplated therein and interpret any rules included therein in the context of the prevailing economic circumstances, for the promotion of capital market development” (Argentina 2012, art. 19; Fitch Ratings 2019b).

The CNV’s General Resolution No. 806 gave funds the option to group assets by liquidity and investor class. The general resolution stipulated that if a fund’s board decided to exercise this option, it would have to notify the CNV within 48 hours of making the decision by submitting minutes of the board of directors’ meeting as evidence of the decision to exercise the option (CNV 2019a).

If the fund’s board decided to group assets by liquidity, the CNV required the fund to submit an accounting certificate signed by an independent public accountant verifying that certain grouping and equal treatment criteria were considered (CNV 2019a).

Minister of Economy Hernán Lacunza announced the debt rescheduling in a speech on Wednesday evening, August 28, 2019. He emphasized that the extension did not indicate that Argentina was insolvent. Rather, he said, the country had a liquidity problem. Lacunza also stated that the measure was aimed at alleviating the financial burden for the country in the short and medium term (Lacunza 2019).

On Thursday afternoon, August 29, 2019, the CNV released a joint statement with the CAFCI and indicated that following meetings between the Ministry of Finance, CNV, and CAFCI, the CNV had decided that individuals who invested indirectly in the affected securities (such as through mutual funds) would be treated the same as persons who invested in such securities directly, meaning they would be exempt from the extension of maturity. Later that day, the CNV issued a regulation providing funds with the capability to provide individual investors with the same benefits extended under Decree No. 596/2019 (CNV 2019a). The CNV also said that they expected the CAFCI to be able to coordinate the necessary operational capabilities within a day, so the redemption rights for retail investors would not have to be suspended beyond that time frame (CNV 2019a; CNV 2019b).

A local news agency also reported that several customers received the news via emails from their respective funds or when they were trying to access their account online (Yosovitch 2019).

The BCRA released several press releases to announce details surrounding the measures implemented to aid the mutual fund industry. The BCRA also disclosed key data regarding the uptake of the programs they launched and the performance of the mutual fund industry after the gating. The BCRA disclosed in their monthly monetary report for August 2019 that the private sector deposit stock declined by 17% month-on-month to USD 26.6 billion. In October 2019, the BCRA also released a monetary policy report that detailed the BCRA’s liquidity program for impacted mutual funds (BCRA 2019a; BCRA 2019b; BCRA 2019c; BCRA 2019d; BCRA 2019e).

On August 29, 2019, uncertain how to comply with the government’s decree exempting individual holders (including indirect holders through mutual funds) from its extension of maturities of certain government securities, CAFCI coordinated an industrywide suspension of redemption rights to allow funds to make operational adjustments to their accounting systems to apply different prices to the same securities in order to comply with the decree (Fitch Ratings 2019b).

Given the difference in how the rescheduling of the short-term public debt was applied to different investor classes, and the mutual fund industry’s initial operational inability to apply different prices to the same securities depending on the investor class and date of investment, the funds had to suspend redemption rights to give themselves time to adjust their accounting systems (Fitch Ratings 2019b).

The CAFCI consulted with government authorities on tools to provide individual investors in mutual funds with the same benefits provided for individual retail investors in Decree No. 596/2019. While reopening dates varied, most mutual funds had resumed normal operations and redemptions by September 13, 2019; therefore, the gates were imposed for approximately 15 days (CE NoticiasFinancieras 2019a; Fitch Ratings 2019b).

The terms of the short-term Argentine debt restructuring did not apply to securities held by holders identified as individuals as of July 31, 2019, who retained such ownership until redemption. Individuals who purchased such securities after July 31, 2019, would, therefore be subject to the extended payment in the same manner as institutional holders.

The government’s decree compelled mutual funds to treat investor classes differently. As of July 31, 2019, domestic individual investors were segregated into funds that received principal and interest payments according to the original terms of the affected securities and matured on their original maturity dates. Institutional investors and individual investors who had not held the affected securities as of July 31 and continuously until maturity were segregated into funds in which the rescheduled securities were subject to the extended maturities and delayed payment restrictions (Fitch Ratings 2019b).

The regulator also allowed funds to honor redemption requests on illiquid assets on their portfolio via a payment in kind mechanism, meaning redeeming investors would receive nonliquid securities proportional to their claim on the fund's illiquid assets. The CNV also specified if a fund chose to use the tools outlined in the general resolution, and later suspended its use of these tools, it could not then re-apply the groupings allowed under the general resolution for 30 calendar days after it suspended the use of the tools initially. Through General Resolution 806/2019, adopted by the CNV, funds were allowed to apply redemption fees proportional to the percentage of liquid assets held in each fund’s portfolio (CNV 2019a).

In practice, funds met regulatory requirements by dividing funds into three separate new funds:

• Retail funds with rescheduled assets. Retail investors could (1) hold their fund shares and expect that their indirect investments in the affected securities would receive principal and interest on time, through the scheduled maturity of the securities; or (2) redeem their fund shares for the affected securities in kind, in which case they would receive those principal and interest payments directly. In the latter case, however, funds could charge a redemption fee;
• Institutional funds with rescheduled assets. Institutional investors faced the same choice between holding their shares and redeeming their shares for the affected securities; in either case, though, they would be subject to the extended maturities of the securities;
• Funds for all investors with unaffected assets. Investors could redeem these shares for cash, or in kind for illiquid securities. (CE NoticiasFinancieras 2019d)

Most mutual funds resumed redemptions by September 13, 2019, under the new rules, and had suspended redemption rights on August 29, 2019, therefore the gates were imposed for approximately 15 days (Fitch Ratings 2019b).

It is not clear what the range of recoveries for institutional investors was following the rescheduling. The prices of the affected bonds fell drastically in August on the market because of the crisis around government debt and the peso. But unless the government defaulted on the affected securities, it would pay the funds the full amounts back, just on different timelines. Still, those delays in payments would have been costly for some institutional investors.

In the month of August 2019, net outflows (redemptions less subscriptions) from mutual funds—mostly from money market funds and fixed-income funds—were ARS 236 billion, a decline of 28% for the industry overall. By the end of September 2019, the mutual fund industry had largely stabilized  (CAFCI 2019).

In September, as mutual funds lifted the restrictions on redemptions, fixed-income funds again experienced substantial net outflows, likely reflecting large numbers of retail investors redeeming to take advantage of the new redemption terms after those funds reopened. In contrast, money market funds, some of which did not suspend redemptions in August, experienced substantial net inflows in September—more than making up for their net outflows in August (CAFCI 2019).

By the end of 2019, money market fund assets under management had risen to ARS 349 billion (42% of the industry), compared to ARS 137 billion (23% of the industry) at the end of August. Fixed-income fund assets had recovered to ARS 274 billion from their trough of ARS 240 billion at the end of September; they had fallen to 33% of the industry from 55% at the end of 2018 (CAFCI 2019).

Research did not indicate that funds had to verify solvency before resuming normal activity.

Research did not indicate the use of other special conditions or restrictions on the management of funds.

Since most of the fund industry in Argentina uses the same accounting system, the government and CAFCI were able to work with the funds on viable solutions that were widely applicable so that the funds could resume redemption activity quickly. While most funds resumed redemption activity by September 13, 2019, the reopening of individual funds was staggered based on the investor profile of the fund and the percentage of its securities affected by the rescheduling. According to a Fitch Ratings note, funds with higher proportions of retail investors faced greater operational challenges than those with higher institutional ownership. However, Fitch also noted that in all cases, given that the affected securities are short-term bonds, normalized redemption activity should ultimately be facilitated via bond maturities (Fitch Ratings 2019b).

On January 10, 2020, the BCRA announced that it would discontinue repo transactions with mutual funds on February 3, 2020 (BCRA 2019e).

The CNV issued regulations aimed at limiting the ability of mutual funds to invest in foreign currency and sovereign bonds denominated in foreign currency, to lower the demand of securities that are commonly used in transactions structured to allow Argentine residents to purchase foreign currencies above their respective capital control limits. During 2022, most foreign asset managers suspended or terminated their plans to increase their presence in Argentina (Mairal 2022).