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Mutual Funds Forced Into Pesos, Values Drop

By | [email protected] | September 23, 2015 5:51pm

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A surprise announcement on Tuesday morning by the CNV, the Argentine securities regulator, caused mutual funds to sell off their dollar-denominated assets or risk being priced in pesos.

CNV General Resolution 646 requires mutual funds to value foreign assets at the official rate of 9.39 ARS/USD rather than the previously used market rate of around 14 ARS/USD. The announcement will not be published in the Official Bulletin — and thus not take effect — until Friday, so mutual funds are taking advantage of the opportunity to sell their dollar-denominated assets before they lose over 60 percent of their value.

CNV president Cristian Girard stated that the measures are to protect investors and reduce high levels of volatility and excessive currency fluctuations, which is so ridiculous that it’s basically insulting to anyone with a brain.

This is a move by the government to bring down the contado con liquidacion, CCL, or “blue chip swap” rate in the short term by temporarily flooding the local market with dollars and to force more money to be invested in the local market and prop up this sham of an economy. The losers are investors in mutual funds, which are small and middle income people who use mutual funds to invest their savings. These investors look to dollar-asset mutual funds to protect their savings from the Argentine peso. Removing this dollar-backed safety in the name of reducing volatility and protecting investors is literally insane.

Yesterday the CCL rate dropped from 14.15 ARS/USD to 13.03 ARS/USD, then recovered to close to 13.60 ARS/USD reflecting a loss of 3.7 percent. The change in how mutual funds are allowed to value their assets would represent an estimated 30 percent loss in value if the funds do not sell off these assets before the measure comes into effect on Friday.  The law affects roughly US$15 billion worth of assets that are held between about 25 mutual funds, mostly fixed income or bond funds.

CAFCI, the association of mutual funds, has already sought a court order to either delay or block this measure based on a total lack of clarity of which instruments exactly are affected by this new measure. While local currency bonds traded in dollars overseas are affected, there is still no answer on whether stocks and bonds of Argentine companies traded overseas must also be valued in pesos.

While this measure won’t directly hinder those who use bonds and stocks to move funds in and out of Argentina with a broker dealer, it will impact institutions who use mutual funds to facilitate these transfers.

Meanwhile, the “blue dollar” has gone up and crossed the 16 ARS/USD threshold as small savers who can no longer rely on mutual funds have turned to the parallel currency market to move their savings into dollars. The exit from these dollar-denominated assets as well as outflow from mutual funds is expected to continue until Friday.