New Swap Transactions Rules

Article by Walter Douglas Stuber and Adriana Gödel Stuber

At meeting held on July 26, 2001, the Brazilian Monetary Council (CMN) issued new rules providing on term and over-the-counter swap transactions, and agreements traded in commodities future exchanges and entities authorized to operate by the Brazilian Central Bank (Bacen) or the Brazilian Securities and Exchange Commission (CVM). These new rules were made public by means of Resolution number 2873 of Bacen, dated July 26, 2001.

For purposes of Resolution number 2873/01, a transaction will be deemed to have occurred over the market if contracting thereof was not accomplished by means of auction sale or floor trading. Based on the definition in said Resolution, swaps are transactions effected for settlement, on a later date, that entail swap of financial income resulting from the application on assets and liabilities of reference rates or indexes.

Under the terms of the new regulation, only certain financial institutions were authorized to effect over-the-counter and on their own account or account of third parties, term and non-standardized option swap transactions backed on gold, exchange rates, currency indexes, interest rates, commodities, price indexes, interest rate indexes, shares of public companies issue, share indexes, simple or share-convertible debentures and promissory notes issued by joint stock corporations (sociedades anônimas) designed for public offer. Financial institutions expressly authorized to effect such transactions are multiple banks, commercial banks, the Federal Savings Bank, investment banks, brokerage houses and securities dealership companies.

Price indexes shall have their series regularly calculated and be known to the public. Shares, gold and commodities prices should be those charged under trade scenario consented to by Bacen or CVM or ascertained as reference by methodology previously authorized by the regulatory bodies. Share indexes shall be calculated based on shares that meet such requirements.

Resolution number 2873/01 additionally establishes the obligation to register these transactions with systems run by stock exchanges, commodities futures exchanges or entities duly authorized to operate by the Bacen or the CVM, within their respective authorities, to such activities and that meet the tax and control requirements by such authorities (Bacen and CVM). The following provisions apply to the commodities futures exchanges:

1. Commodities futures exchanges shall include in their operating rules provisions allowing prevention or correction of unusual market conditions that may constitute violation of legal or regulatory rules, or that constitute inequitable practice, fraud or manipulation;
2. Upon determination of any of the events provided in the previous item, it is incumbent on the commodities futures exchanges to make arrangements to restore the proper operation of respective market, and shall inform Bacen and CVM of any irregularity found and the corrective measures taken;
3. The commodities futures exchanges and their members are under the obligation to provide information, including information on the market under their management, as required by Bacen and CVM and the entities legally authorized to access such information.

Swap transactions dealt with under Resolution number 2873/01 are conditioned upon the nomination, by the authorized financial institutions, of a technically qualified administrator accountable to Bacen for such transactions.

CVM will interfere if the asset traded is backed on security subject to Law number 6.385 of December 7, 1976 (which provides on the securities market and establishes CVM), that is, in the case of:

1. shares, founders’ shares, coupons thereof and subscription warrants;
2. securities certificates of deposit; and
3. other securities created or issued by joint stock corporations, at the option of the National Monetary Council. To date, several other securities have been authorized, namely: promissory notes issued by joint stock corporations and designed for public offer; stock portfolio indexes; securities put and call options; subscription rights; subscription receipts; real estate fund quotas; certificates of audio-visual investment; joint ventures for animal fattening purposes; certificates representing electric power term purchase and sale agreements; depositary receipts used in the placement of Brazilian companies’ shares in the international market; certificates of real estate receivables (CRI); and securities or collective investment agreements that generate right to ownership, partnership or compensation, including those arising out of provision of services, whose earnings result from the efforts of undertaker or third parties, if such securities or agreements are offered publicly. Additionally, any derivative whose asset-object is among the securities listed above shall be indicated as securities, and other securities created or issued by joint stock corporations, so long as they are inserted in the concept of security and duly registered with CVM.

Another important aspect is that Bacen and CVM may take measures and lay down complementary rules required to the performance of Resolution number 2873/01, change the established conditions for swap contracting and curb the performance of authorized financial institutions relatively to the transactions effected under Resolution 2873/01.

São Paulo, August 30, 2001