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Legal Issues Under Brazilian Law Márcio Bonfiglioli José Eduardo Carneiro Queiroz

Legal Issues Under Brazilian Law Márcio Bonfiglioli José Eduardo Carneiro Queiroz. Gambling. The Brazilian Civil Code (dated as of 1916 and currently in force) establishes that gambling debts are not enforceable against debtors (article 1,477)

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Legal Issues Under Brazilian Law Márcio Bonfiglioli José Eduardo Carneiro Queiroz

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  1. Legal Issues Under Brazilian LawMárcio Bonfiglioli José Eduardo Carneiro Queiroz

  2. Gambling • The Brazilian Civil Code (dated as of 1916 and currently in force) establishes that gambling debts are not enforceable against debtors (article 1,477) • It further provides that agreements relating to commodities, assets and stock exchange securities for which settlement is stipulated exclusively by the difference between the price agreed upon by the parties and the market quotation on the maturity date shall be equated to gambling for all purposes (article 1,479)

  3. Gambling • The financial system was not developed when the Brazilian Civil Code was created • The stock exchange and derivative markets were regulated afterwards

  4. Gambling • Pursuant to article 816 of the new Brazilian Civil Code (effective as of 2003), agreements relating to commodities, assets and stock exchange securities for which settlement is stipulated exclusively by the difference between the price agreed upon by the parties and the market quotation on the maturity date shall no longer be equated to gambling for all purposes

  5. Credit Derivatives • Credit Derivative is defined as the negotiation of a credit risk without the transfer of the underlying asset(s) • Regulation: • Brazilian Monetary Council Resolution number 2,686, dated as of 01.26.2000 (Credit Linked Notes) • Brazilian Monetary Council Resolution number 2,933, dated as of 02.23.2002 (Swaps) • Brazilian Central Bank Circular number 3,106, dated as of 04.10.2002 (Swaps)

  6. Credit Linked Notes • Special Purpose Companies may issue securities backed by credits in the Brazilian market or abroad • Companies must have the special purpose of acquiring credit rights and issuing credit-backed securities • Brazilian regulation does not foresee the issuance of all types of credit-linked notes available in the international markets

  7. Other Credit Derivatives • Credit Default Swap: the party assuming the credit risk receives a payment for which a cap and a floor have been previously established • Total Return Swap: the grantor receives payment based on the flow of payments originated by the underlying assets

  8. Main Characteristics • The credit risk of the underlying asset(s) must be owned by the party transferring such risk (exception made to assets traded in organized markets) • The value of the transferred risk is limited to the value of the underlying asset • The negotiation must be registered with authorized entities

  9. Regulatory Prohibitions • Options associated with Credit Default Swap and/or Total Return Swap • Transactions between companies of the same group • Credit Default Swap and/or Total Return Swap cannot be denominated in a currency other than that of the underlying asset nor can it be indexed differently to the asset

  10. Disclosure • Financial institutions which enter into transactions with credit derivatives must inform to the Central Bank of Brazil: • policy, objectives and strategy for the negotiation of assets; • volume of credit risk received and transferred; • effect on its required capital; • amount and characteristics of the risk transferred and/or received; • type of derivative transaction performed (credit default swap or total return swap).

  11. Required Approvals • Prior approval from the Central Bank of Brazil is not required • Any financial institution which performs transactions with a single counterparty in which more than 10% of its required capital is involved must inform so to the Central Bank of Brazil

  12. International Hedge • Regulation: • Brazilian Monetary Council Resolution number 2,012, dated as of 07.30.1993 • Central Bank of Brazil Circular number 2,348, dated as of 07.30.1993 • Private entities can perform transactions with foreign banks or stock exchanges seeking currency, interest rate or commodities fluctuation protection • The rule allows for OTC and/or exchange transactions

  13. Characteristics • The purpose of the transaction must be the performance of a hedge; observance of international parameters for similar transactions is required • The transfers of funds associated with hedge transactions must be performed on the free rate foreign exchange market • Companies are allowed to have margin accounts maintained abroad, for hedging purposes – problems with colateral.

  14. Disclosure and Registration • Underlying transactions must be registered with the Central Bank of Brazil • Within 10 days of the contracting of the hedge transaction, the company must inform to the Central Bank of Brazil the characteristics and conditions of the transaction.

  15. Non-Registered Transactions • In the case of hedge transactions related to financial or trade obligations not registered with the Central Bank of Brazil, the financial institutions which perform the associated remittances of funds must verify the documentation attesting to the existence of the hedged risk

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