CMN Resolution No. 4662 — Bilateral Margin Requirements for Derivatives

The Central Bank of Brazil, in accordance with Article 9 of Law No. 4,595 of December 31, 1964, makes public that the National Monetary Council, in a session held on May 25, 2018, based on the provisions of Articles 3, items V and VI, and 4, item VIII, of the aforementioned Law, Articles 9 and 10 of Law No. 4,728 of July 14, 1965, Article 20, § 1, of Law No. 4,864 of November 29, 1965, Articles 7 and 23, item "a", of Law No. 6,099 of September 12, 1974, Article 1, § 1, and 12 of Complementary Law No. 130 of April 17, 2009, and Article 1, § 2, of Provisional Measure No. 2.192-70 of August 24, 2001,

R E S O L V E S:

CHAPTER I

OBJECT AND SCOPE OF APPLICATION

Art. 1 This Resolution provides for the requirement of bilateral margin collateral in derivative financial instrument operations carried out in the country or abroad by financial institutions and other institutions authorized to operate by the Central Bank of Brazil.

§ 1 For the purposes of this Resolution, a derivative is considered to be a financial instrument that cumulatively presents the following characteristics:

I - its market value varies due to changes in a certain interest rate, price of a financial instrument, price of a commodity, exchange rate, price index or rates, credit rating or index, or another similar variable, provided that, in the case of a non-financial variable, it is not specific to one of the parties to the contract;

II - its initial net investment is zero or small relative to the value of the contract; and

III - its settlement is carried out on a future date.

§ 2 For the purposes of item I of § 1, a non-financial underlying variable is considered specific to one of the parties to the contract when its value depends on the conditions of a specific asset owned by that party, and not just on general market conditions.

§ 3 The provisions of this Resolution do not apply:

I - to derivative operations settled through an entity that acts as a central counterparty, provided that entity:

a) is a clearinghouse or clearing and settlement service provider authorized by the Central Bank of Brazil, in accordance with Law No. 10,214 of March 27, 2001, and current regulations;

b) is recognized as qualified by the Central Bank of Brazil, in accordance with Circular No. 3,772 of December 1, 2015; or

c) complies with regulations that are in conformity with the principles established by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO);

II - to derivative contracts with provision for physical delivery of commodities, except gold; and

III - to operations carried out within the scope of the Brazilian foreign exchange market governed by Resolution No. 3,568 of May 29, 2008.

CHAPTER II

COVERED INSTITUTIONS, COUNTERPARTIES, AND OPERATIONS

Section I

Covered Institutions and Counterparties

Art. 2 For the purposes of this Resolution, the following are considered:

I - covered institution: an institution authorized to operate by the Central Bank of Brazil that possesses, individually or jointly with other entities belonging to the operational group to which it belongs, an average aggregate notional value of derivative operations exceeding BRL 25,000,000,000.00 (twenty-five billion reais); and

II - covered counterparty:

a) the covered institution and any entity belonging to its operational group; and

b) any other entity that possesses, individually or jointly with other entities belonging to the operational group to which it belongs, an average aggregate notional value of derivative operations exceeding BRL 25,000,000,000.00 (twenty-five billion reais), among the following:

1. open complementary pension entities;

2. closed complementary pension entities;

3. insurance companies;

4. investment funds;

5. securitization companies; and

6. other legal entities constituted in the country and abroad that are not institutions authorized to operate by the Central Bank of Brazil.

§ 1 The following are not considered covered counterparties for the purposes of this Resolution:

I - the National Treasury and the Central Bank of Brazil;

II - the central governments of foreign countries and their respective central banks, whose external issuer credit risk rating, granted by a credit rating agency registered or recognized in Brazil by the Securities and Exchange Commission (CVM), is:

a) equal to or higher than AA- or equivalent rating; or

b) equivalent to investment grade, provided that the reference currency for the settlement of obligations related to the derivative operation is the local currency of the foreign country;

III - the European Union and the European Central Bank; and

IV - the following multilateral entities:

a) World Bank Group, comprising the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA);

b) Inter-American Development Bank (IDB);

c) African Development Bank (AfDB);

d) Asian Development Bank (ADB);

e) European Bank for Reconstruction and Development (EBRD);

f) European Investment Bank (EIB);

g) European Investment Fund (EIF);

h) Nordic Investment Bank (NIB);

i) Caribbean Development Bank (CDB);

j) Islamic Development Bank (IsDB);

k) Council of Europe Development Bank (CEB);

l) Bank for International Settlements (BIS); and

m) International Monetary Fund (IMF).

§ 2 The external risk rating referred to in item II of § 1 must be the one corresponding to the highest risk level, when more than one rating is available.

Section II

Operational Groups

Art. 3 The operational group of the authorized institution, mentioned in Article 2, items I and II, item "a", must be constituted:

I - by institutions authorized to operate by the Central Bank of Brazil and by other entities and investment funds belonging to the same prudential conglomerate, defined in accordance with the Accounting Plan of Institutions of the National Financial System; and

II - by insurance companies over which any of the institutions belonging to the prudential conglomerate referred to in item I holds direct or indirect control, in accordance with Article 3 of Resolution No. 4,280 of October 31, 2013.

Art. 4 The operational group of other entities, mentioned in Article 2, item II, item "b", must be constituted:

I - by the entity referred to in Article 2, item II, item "b";

II - by other legal entities included in the consolidated financial statement of the entity referred to in item I, prepared in accordance with the legislation applicable in the country of constitution of that entity;

III - by investment funds whose shares are held exclusively by the entities referred to in items I and II, individually or jointly; and

IV - by investment funds whose shares are held exclusively by the funds defined in item III or by the entities referred to in items I and II, individually or jointly.

Art. 5 In the case where the counterparty is an investment fund, the operational group to which it belongs will be:

I - the operational group of its shareholders, if the fund's shares are held exclusively by shareholders belonging to the same operational group; and

II - the investment fund itself, in other cases.

Section III

Average Aggregate Notional Value

Art. 6 The average aggregate notional value referred to in Article 2, items I and II, item "b", must correspond to the average of daily values calculated on all business days of the months of March, April, and May, each year, observing the individual position and the operational group position, as applicable.

§ 1 The average aggregate notional value referred to in Article 2, item II, item "b", must be calculated excluding operations carried out for hedging purposes by entities classified under Article 2, item II, item "b", item 6.

§ 2 In the calculation of the average aggregate notional value referred to in the main text, derivative operations carried out between entities belonging to the same operational group must be accounted for only once, except as provided in § 1.

§ 3 Derivative operations carried out by an institution authorized to operate by the Central Bank of Brazil with investment funds not belonging to an operational group under Articles 3 and 4, subject to a collateral structure where the default risk of the fund is guaranteed by its managers or administrators, must be treated as operations carried out between the institution and the managers or administrators for the purposes of calculating the aggregate notional value referred to in the main text.

§ 4 The documentation regarding the calculation of the average aggregate notional value of the counterparty's operational group may consist exclusively of declaratory documents issued by the counterparty itself, clearly and objectively justified, provided that the institution authorized to operate by the Central Bank of Brazil does not possess contrary information.

Section IV

Covered Operations

Art. 7 For the purposes of this Resolution, covered operations are considered to be derivative operations, except:

I - derivative financial instruments belonging to the asset portfolio of Guaranteed Real Estate Notes, governed by Resolution No. 4,598 of August 29, 2017;

II - derivative financial instruments carried out between institutions belonging to the same prudential conglomerate;

III - foreign currency forward contracts with physical settlement (FX forward); and

IV - foreign currency swap contracts with physical settlement (FX swap).

CHAPTER III

MARGIN REQUIREMENTS

Section I

General Provisions

Art. 8 Covered institutions must permanently maintain collateral margin for covered operations carried out with their covered counterparties.

§ 1 The collateral margin is composed of:

I - initial margin, which must be constituted for the purpose of protecting institutions and covered counterparties from future exposure associated with changes in the market value of derivative contracts held until the eventual closure or replacement of the position in the event of default by one or more counterparties; and

II - variation margin, which must be constituted for the purpose of protecting institutions and covered counterparties from current exposure associated with the market value of derivative contracts.

§ 2 The collateral margin shall be constituted through financial instruments defined by the Central Bank of Brazil.

Section II

Initial Margin

Art. 9 Covered institutions must constitute collateral for covered operations carried out with their respective covered counterparties in order to permanently maintain the amount of initial margin at a value equal to or higher than the minimum initial margin.

§ 1 The margin referred to in the main text must be constituted bilaterally, based on the gross values calculated for each counterparty.

§ 2 Covered institutions are exempt from the obligation to constitute initial margin in hedging operations carried out with investment funds constituted in Brazil, whose set of shareholders is formed exclusively by the foreign controller of the covered institution and by foreign entities controlled by that same controller.

Art. 10 Covered institutions must calculate the value of the minimum initial margin to be constituted with each covered counterparty every ten business days at most, or on the business day following any of the following events:

I - contracting of a new operation with the same counterparty;

II - partial or total settlement of an operation with the same counterparty; or

III - occurrence of another event that alters the composition of the derivative portfolio with the same counterparty.

Sole paragraph. The minimum initial margin must be calculated based on operations in effect until at least the business day prior to the date of calculation.

Art. 11 Covered institutions must, if necessary, update the value of initial margins with their respective covered counterparties by the first business day following the calculation of the minimum initial margin.

Sole paragraph. The update of the margin referred to in the main text consists of the constitution of additional margin to comply with the initial collateral margin referred to in the main text of Article 9.

Art. 12 Covered institutions are exempt from the obligation:

I - to constitute the initial margin referred to in Article 9, when the sum of the minimum initial margins calculated for all covered operations carried out between the institutions, entities, and investment funds belonging to their operational group and all institutions, entities, and investment funds belonging to the operational group of the covered counterparty is less than BRL 150,000,000.00 (one hundred and fifty million reais);

II - to deliver collateral for initial margin, in operation modalities that do not offer counterparty credit risk; and

III - to receive collateral for initial margin, in operation modalities that are not subject to counterparty credit risk.

§ 1 If the sum mentioned in item I of the main text is higher than BRL 150,000,000.00 (one hundred and fifty million reais), the initial margins referred to in item I of the main text must be constituted in such a way that the aggregate value of these margins is higher than the value exceeding BRL 150,000,000.00 (one hundred and fifty million reais).

§ 2 Covered institutions belonging to the same operational group must define which of these institutions are obligated to constitute margins in accordance with § 1.

Section III

Variation Margin

Art. 13 Covered institutions must constitute collateral for covered operations carried out with their respective covered counterparties in order to permanently maintain the amount of variation margin at a value equal to or higher than the minimum variation margin.

Art. 14 Covered institutions must calculate the value of the minimum variation margin with their respective covered counterparties daily, based on operations in effect until at least the business day prior to the date of calculation.

Sole paragraph. Periodic payments made up to the time of constitution of the variation margin may be considered for the purposes of calculating the market value of derivatives.

Art. 15 Covered institutions must update the value of variation margins constituted with their respective covered counterparties by the first business day following their calculation.

Sole paragraph. The margin update referred to in the main text consists of the constitution of additional collateral margin to comply with the provisions of Article 13.

Section IV

Common Provisions Regarding Initial and Variation Margins

Art. 16 Covered institutions are exempt from the obligation to update the margins mentioned in Articles 11 and 15, when the additional value of the collateral margin to be constituted with the same counterparty, since the last margin update, is less than BRL 1,500,000.00 (one million and five hundred thousand reais).

Art. 17 If the institution and the counterparty are considered covered, in accordance with Article 2, the margin requirement referred to in this Resolution will be:

I - applied only to operations contracted from September 1 following the reference months for the calculation of the average aggregate notional value mentioned in Article 6, if the institution or counterparty was not considered covered before the calculation; and

II - applied to all operations in effect or contracted after the calculation of the average aggregate notional value mentioned in Article 6, if the institution and the counterparty were already considered covered.

Art. 18 If the institution or the counterparty ceases to be considered covered, in accordance with Article 2, the margin requirement referred to in this Resolution will cease to be applied immediately to all operations contracted by it.

Art. 19 For the purposes of calculating the minimum margin values referred to in Articles 10 and 14, the offsetting of values related to contracts covered by the same bilateral agreement for the offsetting and settlement of obligations will be permitted.

Sole paragraph. In the case where the bilateral agreement for the offsetting and settlement of obligations referred to in the main text comprises other financial instruments besides derivatives, only derivative contracts must be considered for the purposes of calculating the minimum margin values referred to in Articles 10 and 14.

Section V

Segregation of Initial Margin

Art. 20 The constitution of collateral on financial instruments for the purposes of the initial margin requirement must be formalized through a contractual instrument with full legal effect in all jurisdictions where it must or may produce effects, whose clauses ensure, at a minimum:

I - the timely settlement or transfer of ownership of the financial instrument received as initial collateral margin, in the event of counterparty default;

II - the segregation of the financial instruments used as initial collateral margin from the assets of the guarantor and guaranteed entities, ensuring their timely availability in the event of insolvency or declaration of bankruptcy or resolution regime by competent authorities; and

III - the prohibition of alienation or reuse of the financial instruments received as collateral for any other purposes, including the constitution of collateral for new operations by the receiving counterparty.

CHAPTER IV

OPERATIONS WITH FOREIGN COUNTERPARTIES

Art. 21 A covered institution will have its collateral margin requirements considered met in operations with foreign counterparties if the following conditions are satisfied:

I - the covered institution is required to constitute collateral margin for covered operations, defined in accordance with Article 7, respecting the requirements established in the regulation of the foreign jurisdiction in which its counterparty is constituted; and

II - the requirements established in the regulation of the foreign jurisdiction are compatible with the minimum standards established by the Basel Committee on Banking Supervision (BCBS) and IOSCO.

CHAPTER V

OTHER RESPONSIBILITIES OF COVERED INSTITUTIONS

Art. 22 Covered institutions must verify whether their counterparties are considered covered counterparties prior to carrying out the respective covered operations.

Sole paragraph. Covered institutions must declare the need for margin requirements to their respective covered counterparties, in their covered operations, prior to their contracting.

Art. 23 The rights and obligations necessary for the compliance with this Resolution must be provided for in contracts celebrated by covered institutions with each covered counterparty.

§ 1 The contracts referred to in the main text must be formalized in such a way as to obtain full legal effect in all jurisdictions where they must or may produce effects, and establish, at a minimum:

I - the rights and obligations related to the constitution of initial and variation collateral margins, as provided in this Resolution;

II - the procedures for the constitution of collateral margins;

III - the methodologies, parameters, and other conditions necessary for the calculation of the quantitative values related to initial and variation collateral margins; and

IV - the procedures for the resolution of disputes regarding the evaluation of initial and variation collateral margins or the values of the financial instruments that compose them.

§ 2 The contracts mentioned in the main text must describe the events that will enable each of the parties to enforce their respective guarantees.

CHAPTER VI

FINAL AND TRANSITIONAL PROVISIONS

Art. 24 Covered operations carried out until August 31, 2019, are exempt from the requirement referred to in this Resolution.

Art. 25 Covered operations in which at least one of the contracting parties has, individually or jointly with other entities belonging to the operational group to which it belongs, an average aggregate notional value, calculated in accordance with Article 6, lower than BRL 2,250,000,000,000.00 (two trillion and two hundred and fifty billion reais), are exempt from the initial margin exchange requirement referred to in Chapter III, for operations carried out between September 1, 2019, and August 31, 2020.

Art. 26 Covered institutions must indicate to the Central Bank of Brazil the director responsible for the procedures related to the margin requirement referred to in this Resolution.

Sole paragraph. It is admitted that the indicated director performs other functions in the institution, except those related to the administration of third-party resources, trading areas, or others that may imply conflict of interest or represent a deficiency in the segregation of functions.

Art. 27 The institutions mentioned in Article 1 must keep available to the Central Bank of Brazil the documentation necessary to verify compliance with the provisions of Chapters I to V of this Resolution, for a minimum period of five years, counted from the date of occurrence of the fact that gives rise to the documentation.

Art. 28 The Central Bank of Brazil is authorized to adopt the complementary measures necessary for the execution of the provisions of this Resolution, including:

I - the methodology for the purposes of calculating the minimum initial margin and the minimum variation margin;

II - the financial instruments eligible for the constitution of collateral margins;

III - the standardized adjustment factors for each financial instrument used for the purposes of constituting collateral margins; and

IV - the characteristics and the form of disclosure of the documents treated in this Resolution.

Art. 29 The market value calculation process carried out for the purposes of compliance with the provisions of this Resolution must observe the minimum pricing requirements set forth in Resolution No. 4,277 of October 31, 2013.

Art. 30 This Resolution enters into force on the date of its publication.

Ilan Goldfajn
President of the Central Bank of Brazil