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Argentina Tightens Securities Regulation as Peso Slides

Argentina tightened restrictions on mutual funds’ holdings of foreign-company depositary receipts, in a bid to promote investment in domestic companies and curb capital flight.

The regulator reduced the proportion of securities known as Cedears, which are peso-denominated shares and bonds of foreign companies, that mutual funds can hold to 25 percent from 75 percent, according to resolutions published in today’s official gazette. The assets are now considered to be a foreign investment, according to the resolutions.

“It’s appropriate to limit the maximum rate of investment in that asset class to ensure proper channeling of domestic savings into productive development,” according to the resolution.

The measure is part of President Cristina Fernandez de Kirchner’s efforts to curb capital flight and ease pressure on a parallel exchange rate that weakened to a record 8.48 per dollar yesterday. The peso is forecast to depreciate at the fastest rate among world currencies. The country’s foreign reserves have tumbled 13 percent over the past year to $41 billion.

In 2011 the government forced insurance companies to repatriate foreign investments, and last year it ordered them to invest part of their portfolio in government-sponsored companies and projects.

Apple Investments

Cedears include 27 corporate bonds including debt issued by Wal-Mart Stores Inc. and Coca-Cola Co., and 220 shares of companies including Apple Inc., BP Plc, Citigroup Inc. and Pfizer Inc., according to Deutsche Bank AG, which establishes the list.

Those Cedears that don’t trade on local exchanges must be valued according to the closing price in the market where they trade, using the official currency rate published by state-controlled Banco de la Nacion Argentina, according to the resolution.

Few of the securities trade on the local exchanges, so the new valuation rules could saddle the mutual funds with “a loss on the portfolio and volatility,” said Luis Celasco, who manages 1.7 billion pesos ($333.2 million) of Argentine debt at RJ Delta, a unit of Raymond James Financial Inc. in Buenos Aires.

Investment funds will have to provide the regulator with details of the composition and valuation of their portfolios, according to the resolution.

Capital Flight

New restrictions that spur mutual funds to sell some of their Cedears could be an attempt by Fernandez to bring dollars into the country, according to Jorge Piedrahita, chief executive officer of New York-based brokerage Torino Capital LLC. Fernandez has imposed restrictions on dollar purchases since her re-election in October 2011 to stem capital flight.

“If you force a liquidation of those, you generate dollars” as the Cedear transactions are unwound, said Piedrahita. The net effect would be an increased supply of dollars, which should ease the pressure on the parallel rate, he said.

Telephone calls to the securities regulator’s press department seeking comment on the resolution went unanswered.

The peso fell 0.2 percent to 5.1112 in the official market in Buenos Aires. The rate implied in price differences between securities traded locally and abroad strengthened 1.91 percent to 8.3205, the biggest gain since Feb. 18. The gap to the parallel rate surged after the nation on March 18 raised the tax on credit and debit card purchases abroad to 20 percent.

On March 20, Fernandez called a meeting with Vice President Amado Boudou, Finance Minister Hernan Lorenzino and central bank chief Mercedes Marco del Pont to discuss the drop in the parallel peso, according to Buenos Aires-based newspaper Clarin.

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