Brazil: Qualified Foreign Central Counterparties In Brazil

Last Updated: 7 December 2015
Article by Walter Stuber

Through Circular No. 3772, of December 1st, 2015, the Central Bank of Brazil (Banco Central do Brasil – Bacen), hereinafter simply referred to as Bacen Circular 3772/2015, regulated the process of recognition of a foreign central counterparty (contraparte central – CPC) as qualified by Bacen.

According to Bacen Circular 3772/2015, the expressions transcribed below are defined as follows:

  • "foreign CPC" means any legal entity incorporated and domiciled abroad hired to assume the position of contracting party for the purpose of liquidation of obligations in relation to the original counterparties of a transaction;
  • "competent authority" means any entity responsible for the regulation, authorization and supervision of the activities of the foreign CPC in its jurisdiction of origin; and
  • "jurisdiction of origin" means the country in which the foreign CPC is incorporated or the territorial area in which it is authorized by the competent authority to exercise its activities.

Bacen will be able to recognize a foreign CPC as qualified if it proves that the following requirements are cumulatively filled:

  1. the foreign CPC must be authorized to carry out transactions in its jurisdiction of origin and subject to authorization and supervision processes to ensure compliance with the principles of efficiency, safety, integrity and reliability that guide the Brazilian Payment System (Sistema de Pagamentos Brasileiro – SPB), as well as it must obey the recommendations and principles applicable to its activities formulated by the Committee on Payments and Market Infrastructures (Comitê sobre Pagamentos e Infraestruras do Mercado - CPMI) and the International Organization of Securities Commissions (IOSCO);
  2. the legal system in force in the jurisdiction of origin of the foreign CPC must contemplate  crime prevention systems of washing or concealment of property, rights and values similar to those established by the Brazilian applicable legislation[1];
  3. the legal system in force in the jurisdiction of origin of the foreign CPC must provide a system for the recognition of the CPC incorporated and domiciled abroad which may be applicable to the chambers and providers of clearing and settlement services incorporated and domiciled in Brazil; and
  4. the existence of a cooperation agreement between Bacen and the competent authority, that disciplines at least the following aspects:
  1. the immediate notification mechanism between Bacen and the competent authority about any relevant change in the applicable legislation regarding the requirements set forth in items (i) to (iii) above;
  2. the mechanism for exchange of information between Bacen and the  competent authority relating to the foreign CPC;
  3. the immediate notification mechanism to Bacen by the competent authority of any violation committed by the foreign CPC that violates the conditions under which the authorization was granted or the regulations to which it is subject; and
  4. the procedures for coordination of the activities of supervision of the foreign CPC, including on-site inspections.

The compliance with the provisions of items (i) to (iv) above will be reevaluated by Bacen whenever any relevant regulatory change occurs.

The recognition of the foreign CPC by Bacen does not mean authorization for operation in Brazil or amendment of the settlement systems regulations of the SPB for which a foreign CPC intends to provide its services[2].

The application for recognition of the foreign CPC must be accompanied by the documents attesting the compliance with the requirements laid down in items (i) to (iv) above. The original documents must be presented with their respective translations into Portuguese, carried out by a public sworn translator.

If recognized as qualified by Bacen, the foreign CPC can provide services exclusively for transactions traded on the organized over-the-counter market for: (a) the chambers and providers of clearing and settlement services members of the SPB; and (b) the members of compensation of the chambers mentioned in item (a).

The recognition of a foreign CPC can be canceled by Bacen at any time when any of the following situations happens: (i) if the cooperation agreement between Bacen and the competent authority ceases to produce legal effects; (ii) if the competent authority cancels, revokes or makes void the authorization granted to the foreign CPC to operate in the jurisdiction of origin; or (iii) if, at the discretion of Bacen, it occurs any relevant regulatory change in the jurisdiction of origin of the foreign CPC involving the non-compliance with the provisions of Bacen Circular 3772/2015.

Within five business days after the notification of Bacen informing about the cancellation of the recognition of the foreign CPC, the system to which such foreign CPC provides services will have to determine as to the continuity or not of the operation. If the conclusion is that the operation must be continued, then the system will submit an application for authorization to Bacen, together with a transition plan, within 90 calendar days as of the date of Bacen´s notification. Should the operation must be discontinued, the system will present an ordered closure plan, providing the treatment for the positions of the open transactions.

From now on foreign CPCs that comply with the provisions of Bacen Circular 3772/2015 may be authorized to render services in Brazil. This new regulation came into full force and effect on December 3, 2015, date of its publication in the Official Gazette of Union (Diário Oficial da União – DOU). 

[1] The applicable Brazilian legislation that governs this matter is Law No. 9613, of March 3, 1998 and its subsequent amendments.

[2] The services must be provided in accordance with Bacen Circular No. 3057, of August 31, 2001, that approves the regulation on the functioning of the systems operated by the chambers and providers of clearing and settlement services that integrate the SPB.

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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Walter Stuber
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