Brazil: The New Brazilian Reference Exchange Rate (TCR)

As of December 19, 2011 the Brazilian Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros - BVMF) started the daily calculation and publication of a new indicator for the spot foreign exchange (FX) market named Reference Exchange Rate (Taxa de Câmbio de Referência – TCR), which is available on the BVMF website.

The TCR is calculated based on spot US Dollar trades and orders (USDP) on the electronic trading platform at 10:00 am, 11:00 am, 12:00 am, 1:00 pm, 3:00 pm, and 4:00 pm (the closing rate). There is also the calculation of two daily averages, at 10:00 am and 1:00 pm: (i) the first is the average of all of the rates published at the first four times, from 10:00 am to 1:00 pm; and (ii) the second is the average of all of the rates throughout the day that are published at the six determined times. In all there will be the calculation of eight daily indicators.


The price formation for the TCRs is established based on the weighted average of all of the trades executed in a one minute interval starting 30 seconds before each of the six determined times. There must be a minimum of five trades before the calculation of each TCR. If there are not five trades, BVMF will calculate the rates by the average of a minimum quantity of ten simultaneous buy and sell orders (spreads). If there are not ten spreads, then the calculation will be made with no requirement for a minimum number of trades. If one of the TCRs cannot be calculated in accordance with any of the three forms of calculation, BVMF will not divulge the stipulated time's TCR. The two daily average TCRs shall be calculated by a simple average, considering the volume of the rates divulged during the two defined periods.

With the launch of the TCR, BVMF seeks to increase foreign exchange market transparency even further, as well as to stimulate the flow of spot market trading on the electronic platform.

Initially, the TCR will be used just as a reference rate for the market, and not as an alternative for the PTAX rate, as explained below. In the future, it is expected that the TCR may be used for other transactions, including exchange derivatives agreements traded on the Brazilian Exchange.

Nowadays, the Brazilian exchange market adopts the rate determined by the Central Bank of Brazil (Banco Central do Brasil – Bacen), known as PTAX rate. Four times daily, the foreign exchange dealers authorized by Bacen must inform bid/offer rates for the exchange rate for the US Dollar – between 10:00 am and 10:10 am for the 10:00 am bulletin; between 11:00 am and 11:10 am for the 11:00 am bulletin; between 12:00 am and 12:10 am for the 12:00 am bulletin; and between 13:00 am and 13:10 am for the 13:00 bulletin. For each bulletin, the published bid/offer rates are the average of the bid/offer rates informed by the dealers, excluding the tow highest bid rates and the two highest offer rates as well as the tow lowest bid rates and the two lowest offer rates. The PTAX rate is the arithmetic average of these four bid/offer rates. The relevant information is daily published in Bacen website and becomes available to the public soon after the last bulletin is posted (after 13:00 pm, Brasilia time).

The PTAX rate has been criticized by many managers of financial institutions and similar entities because it does not reflect the variation of the foreign currency during the afternoon and this may present distortions for marking to market.

Bacen has never opposed to the use of another reference rate for exchange agreements originated from the market and if the TCR succeeds to conquer the trust of the banks, investment funds and other agents and participants of the market, it is very likely that the TCR would become a valid option for the PTAX rate in the future.

Footnotes

The par values of other currencies and units of account in relation to the Brazilian currency (Real) are determined based on the price of these currencies in US Dollars published by Bloomberg or Reuters at 10:00 am, 11:00 am, 13:00 am and 13:00 pm, and the PTAX rate for the US Dollar.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Walter Stuber
Adriana Maria Gödel Stuber
 
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