This content is from: Local Insights


Brazilian financial institutions can now enter into credit derivative agreements to transfer risks relating to credits to each other. These credits may be the result of loans, financing or lease contracts, securities, guarantees, credit derivatives or other financial or commercial contracts implying credit risks, negotiated on the domestic market. The financial institutions must make a commitment to keeping a technically-capable manager responsible for the credit derivatives before the Central Bank of Brazil. This comes about as a result of the Central Bank enacting Circular 3.106 regulating credit derivative transactions on April 10 2002. This had previously been authorized by the National Monetary Council's Resolution 2.933 of February 28 2002.

Two types of credit derivatives are permitted: (i) credit swaps, a transaction in which the party receiving credit risks is paid a fixed fee; and (ii) full return rate swaps, a transaction in which the party receiving credit risks is paid based on the cash flow of charges and instalments received in relation to the underlying assets.

In either case, it is only the credit risk that is assigned. The underlying credit remains with the assignor of the risk. The value of the credit derivative cannot exceed the value of the underlying credit, which must not be assigned during the life of the credit derivative.

The credit derivative contract must specify the date of its liquidation, when any credit deterioration, which may result from events listed in the contract, must be partially or fully (depending on the terms of the contract) restored to the benefit of the assignor of the risk.

Circular 3.106 vetoes the following credit derivatives:

  • options linked to credit derivatives;
  • credit derivatives entered into between entities or individuals of the same group; and
  • credit derivatives which are not concluded in the same currency or index as those of the underlying credits.

Financial institutions entering into credit derivatives to assign credit risks (in compliance with Circular 3.106), are allowed to consider the assignment of the credit risk for the purposes of capital requirements, provided that the following conditions are met:

  • The contract, determines as an event causing the credit deterioration, at least the following situations: bankruptcy or insolvency of the debtor of the underlying assets; filing of a composition agreement to prevent bankruptcy (concordata preventiva) by the debtor of the underlying assets; judicial or extrajudicial liquidation of the debtor of the underlying assets; restructuring of the liabilities of debtors causing deterioration of the quality of the credit of the underlying assets; change of controller, mergers or incorporations of debtors causing deterioration in the quality of the credit of the underlying assets; moratorium of debtors of the underlying assets; default of the underlying assets; compulsory anticipated payment of the underlying assets, as per contractual provisions; and rejection or judicial questioning of the underlying assets;
  • the underlying assets can be legally assigned, in the cases foreseen by the credit derivative contract, if an event causes deterioration of credit quality;
  • there are no cases of joint liabilities of the assignor of the risks in relation to the underlying assets;
  • there are no contract clauses permitting the unilateral termination of the credit derivative contract by the assignee of the risks, except when the assignor defaults;
  • there are no contract clauses allowing the assignee of the risk to avoid payment to the assignor if an event causes the deterioration of the credit.

Finally, financial institutions entering into credit derivatives must publish explanatory notes to their financial statement with information on the following: their policies, objectives and strategies; amount of risks received and transferred (accounting and market value), total and during the period in analysis; impact (increase or decrease) caused in the calculation of the capital requirement; the amount and characteristics of credit transactions transferred and received during the period of occurrence of the credit risk events foreseen in the credit derivative contracts; and discrimination of credit swap and full return rate swap.

Acts Of concentration involving financial institutions: the dispute between the Brazilian competition authority and the Central Bank

The president of the Central Bank announced on April 9 2002, that a bill of law is being prepared to establish the rules for the competition authority (CADE) and the Central Bank to jointly judge mergers, incorporations or acquisitions involving financial institutions authorized to operate by the Central Bank.

The new law would put an end to a dispute between CADE and the Central Bank, dating back to October 2000, when CADE approved, without restriction, a transaction involving the purchase of 40.8% of Credibanco's shares by the BNY International Financial Corporation.

This prompted the Central Bank to submit a consultation to the federal attorney general who issued a legal opinion to the effect that acts of concentration involving financial institutions are subject solely to the Central Bank, on the basis that competition law 8.884/94 cannot supersede the provisions of complementary banking law 4.595/64.

Following a decision by the president of Brazil, issued on April 25 2001, confirming the understanding of the attorney general (in accordance with article 40 of complementary Law 73/93), the Central Bank should have become exclusively responsible for judging and approving cases of acts of concentration involving financial institutions.

However, in November 2001, CADE declared itself to be within its jurisdiction when considering the competition aspects of any financial merger or acquisition if it was prompted to investigate the matter within five years; and CADE approved without restrictions the acquisition of 26% of the capital of the holding of the Finasa group by Zurich Brasil Seguros.

Eliana Maria Filippozzi

Instant access to all of our content. Membership Options | One Week Trial