Brazil: International Hedging in Brazil

By publishing Resolution CMN nº 3312, of August 31, 2005, the Brazilian Monetary Council (CMN) decided to increase the number of players in transactions known as international hedging, which is a security for commercial or financial rights and obligations subject to risks of variation, in the international market, of interest rates, foreign exchange parity or of commodities prices, carried out by financial institutions abroad or at international stock exchanges. That resolution was published on the Federal Official Gazette of September 5, 2005 edition and came into effectiveness on September 19, 2005.

The new rules applicable to international hedging are found in Chapter 7, Title 2 of the Exchange and Foreign Capitals Market Regulation ("RMCCI"), with wording approved by the Brazilian Central Bank (Bacen) in Circular nº 3291, of September 8, 2005. These rules, however, do not apply to transactions made by investment funds of any kind, even those regarded as customers, which are subject to specific regulation.

In the past, only companies performing in the private sector and Petróleo Brasileiro S.A. (Petrobrás) and Companhia Vale do Rio Doce (CVRD) – before its privatization – or their respective subsidiaries, that is, companies whose 50% of the corporate capital with voting rights is held, directly or indirectly by Petrobrás or CVRD, under the terms of Resolution CMN nº 2012, of July 30, 1993 and expressly revoked by Resolution CMN nº 3312/2005, would be authorized to make those transactions. According to the previous methodology, any hedge transactions carried out by other entities in the public sector would need specific clearance from Bacen which was given on a case-by-case basis being that Bacen would report to the Planning, Budget and Coordination Secretariat of the Presidency (Seplan) all authorizations as granted.

Now, as of September 19, 2005, all individuals and legal entities, resident, domiciled or with registered office in the country, including public entities, are authorized and may transfer to and from abroad in relation to international hedging, using banks authorized to operate in the exchange market in Brazil, due respect being given to the provisions in Resolution CMN 3312/2005 and RMCCI.

Within that context, any kind of hedging found in the international market can be used. Included in the rights and obligations subject to hedging are payables and receivables: (i) in national currency, deriving from obligations assumed in foreign currency; (ii) related to importations, exportations or negotiations in the domestic market of commodities whose price is fixed based on quotes of a foreign stock exchange; (iii) trading in commodities and futures exchange in the country; and (iv) exposures assumed in the country by banks accredited to operate in the exchange market with their customers, so long as they are tied to rights or obligations hedgeable abroad, under the terms of the RMCCI.

International hedging in Brazil requires, therefore, the intervention of a bank in the exchange transaction to be entered for payment or receipt of funds from the hedge-related obligations and rights. The intervening bank must be duly authorized to operate in the Brazilian exchange market. It is incumbent on that intervening bank to follow the existing rules in the international market applicable to similar transactions, and ensure the legality and legitimacy of the transaction, by checking the documentation submitted by or profile of the customer and its financial adequacy.

Additionally, financial transfers can be made with respect to hedge of interest rates variation and currencies parity: (a) intended for the establishment of collateral or escrow; accounts; and (b) required for hedging international funds to be disbursed in the future.

International hedging allows remittances for the opening of accounts with foreign brokers and margin deposits, as well as financing of those margins by banks accredited to operate exchange, with the use of foreign credit facilities.

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.