New Regulation For Derivatives Transactions With Sovereign Counterparty In Serbia

According to the Public Debt Act (Zakon o javnom dugu) of the Republic of Serbia, the Minister of Finance manages the country's public debt by (i) entering into transactions that would reduce or eliminate currency risk, interest rate risk and other risks, (ii) deciding on the sale and purchase of foreign currencies, and (iii) managing cash balances on the Republic of Serbia's treasury accounts. The aim of public debt management is to provide the means for regular servicing of budgetary needs at the most favourable conditions and cost of financing, with an acceptable level of risk.

The Public Debt Act entrusts the Government of the Republic of Serbia to regulate the conditions for the performance of financial transactions by the country for public debt management purposes. The Government did this on 26 December 2019 by adopting the Regulation on the Performance of Financial Derivatives Transactions for the Purpose of Managing the Republic of Serbia's Public Debt (Uredba o obavljanju poslova sa finansijskim derivatima u cilju upravljanja javnim dugom Republike Srbije) ("Derivatives Regulation").

The Derivatives Regulation entered into force on 4 January 2020 and has the following key features:

Scope

The Derivatives Regulation lays down the general conditions for the performance of financial derivatives transactions by the Republic of Serbia as a sovereign counterparty. Such derivatives transactions may solely be entered into for the purpose of hedging against risks affecting the amount and structure of public debt and costs of financing of public debt liabilities.

The Derivatives Regulation defines hedging (zaatita od finansijskog rizika (hed~ing)) as a combination of derivatives transactions seeking to manage, reduce or eliminate risk (exchange rate risk, currency volatility risk and other types of risk) relating to the debt instruments issued by the Republic of Serbia.

Within the meaning of this Derivatives Regulation, the following are regarded as financial derivatives: interest rate swaps, cross currency swaps, basis swaps, FX swaps, options, futures and forwards.

Eligible counterparties

The Derivatives Regulation envisions these counterparties: (i) the Ministry of Finance on behalf and for the account of the Republic of Serbia; and (ii) a counterparty.

The Minister of Finance is authorised to negotiate and enter into ISDA Master / CSA agreements on behalf of the Government and for the account of the Republic of Serbia. The Minister of...