On July 27, 2011 the Brazilian Finance Minister, Guido Mantega, announced two new prudential measures aimed to avoid currency speculation in the derivatives market, in order to stem the United States Dollar's fall and prevent the overvaluation of the Brazilian Real. These two measures are commented below.

The first measure is Provisional Measure No. 539, of July 26, 2011 (MP 539/2011), which basically authorizes the Brazilian Monetary Council (Conselho Monetário Nacional - CMN) to establish specific conditions for the negotiation of derivates contracts, for monetary and exchange policy purposes, regardless of the nature of the investor, with powers to also (i) determine deposits over the notional value of the derivatives contract; and (ii) set forth limits, terms and other conditions for the negotiation of such contracts.

MP 539/2011 also amends the Tax on Exchange Transactions (IOF) legislation, namely Decree-Law No. 1,783, of April 18, 1980 and Law No. 8,894, of June 21, 1994, in order to clarify that:

  1. the entities authorized to register derivatives contracts are responsible for collecting the IOF, which is calculated on the amount of the transaction;
  2. in the case of securities transactions involving derivatives contracts, the maximum IOF rate will be 25%. Up to this ceiling (25%), the Executive Branch can amend the applicable rate at any time, considering the monetary and exchange policy goals of the Brazilian Government. However, the current applicable IOF rate for derivatives transactions is 1%, as explained below when the second measure is commented;
  3. the amount of the securities transaction, for IOF purposes, is the adjusted notional value of the derivatives contract. The adjusted notional value is the reference value of the contract (notional value) revised to reflect the difference resulting from the derivatives´ price variation with respect to the underlying assets´ price variation; and
  4. the taxpayer is the holder of the derivatives contract.

As of July 27, 2011 (date of the publication of MP 539/2011 in the Official Gazette of the Union, when this measure came into force), in order to be valid all derivatives contracts must be registered with duly authorized entities, i.e. clearing houses or service providers which have been accredited by the Central Bank of Brazil (Banco Central do Brasil - Bacen) or by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) to operate with clearing, settlement and registry.

The second measure is Decree No. 7,536, also dated July 26, 2011 (Decree 7,536/2011), which amends the IOF regulation approved by Decree No. 6,306, of December 14, 2007. This decree repeats many of the same terms already defined in MP 539/2011.

Pursuant to Decree 7,536/2011, the current applicable IOF rate to derivatives contracts is 1% and it is due in the purchase, sale or maturity of financial derivatives contracts, whenever the settlement amount is affected by the exchange rate variation and results in increase in the net short exposure in relation to the amount calculated at the end of the previous business day within the same entity authorized to register derivatives contracts.

The net exposure is calculated as the sum product of the amount of financial derivatives contracts whose settlement amount is affected by the variation of the exchange rate set by the adjusted notional value of each contract.

Netting is permitted between exposures of the same holder cleared by different entities accredited to register derivatives contracts, provided that the holder expressly authorizes such entities to access information necessary for the calculation of the consolidated net exposure.

The applicable rate is reduced to zero in the case of the above mentioned netting as well as in any purchases, sales or maturities of derivatives contracts that at the end of the day result in net short exposure below US$ 10 million made with the same entity accredited to register derivatives contracts. Above this figure, the 1% rate will apply.

Furthermore, Decree 6,306/2011 contains a provision which is not related to derivatives contracts and deals with foreign currency loans. This provision establishes that the 6% IOF rate which is due in the case of transactions contracted for a term of less than 720 days must also be paid in the event of prepayment of loans with maturity exceeding 720 days, plus interest in arrears and a fine, which may vary from 5% to 100% of the total amount of the transaction, and a penalty of up to R$ 100 thousand to be imposed by Bacen. This measure aims to avoid that a Brazilian borrower contracts a long-term loan benefited with zero IOF rate and then agrees to reduce the term of the transaction immediately afterwards.


1 The Brazilian Tax on Exchange Transactions (Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Títulos ou Valores Mobiliários - IOF) is a tax on credit and exchange transactions, insurance and securities assessed on the amount of bank loans and similar transactions, on the amount of foreign currency purchased or sold, on insurance premiums and the price of securities purchased or sold. The applicable tax rate may vary from zero to 25% and depends on the kind of the operation. The IOF is a regulatory tax and the rates are decreased or increased by the Brazilian government whenever the authorities decide to foster or reduce the inflow of foreign currency funds into the country.

2 So far the only accredited clearing houses are: (i) CETIP OTC Clearing House (CETIP S.A. - Balcão Organizado de Ativos e Derivativos), which is the leading clearing house and central securities depository and derivatives registrar for operations carried out in the over-the-counter (OTC) market; and (ii) the Derivatives Clearing House (Câmara de Derivativos) of the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros). Other clearing houses or service providers may be accredited in the future.