New Rules for Credit Derivatives in Brazil

Co-written by Adriana M. Gödel Stuber

The Brazilian Monetary Council authorized financial institutions and institutions accredited by the Brazilian Central Bank (Bacen) to perform credit derivative transactions. The new rules are contained in Resolution No. 2933 issued by Bacen on February 28, 2002.

According to said Resolution, multi-service, commercial and investment banks; the Federal Savings Banks; loan, finance and investment companies; real estate loan and leasing companies are the only institutions authorized to bear the credit risk in a transaction. In the specific case of leasing companies, the transaction may only occur if the underlying asset relates to credits deriving from leasing transactions.

Resolution 2933 defines credit derivatives as contracts where the transaction's credit risk is negotiated without the transfer of said transactions' underlying asset(s). Underlying asset is any credit deriving from loan, financing and leasing transactions; credit instruments; securities; guarantees; sureties; credit derivatives and other instruments and financial or commercial agreements that are subject to credit risk and negotiated and performed in the domestic market.

As to the liability for the risk, the party acquiring, under a credit derivative contract, the protective right against a given credit risk by making the mutually agreed payment, will transfer the risk. On the other hand, the party assuming, under the same kind of contract, the credit risk related to a given underlying asset and undertaking to compensate, as agreed, the party transferring the risk upon occurrence of a given event, is the bearer of risk.

The Resolution further establishes that the credit derivative transactions may be performed on two occasions: (i) if and when the underlying...