BM&FBOVESPA Foreign Exchange

The system settles interbank foreign exchange transactions carried out over-the-counter¹ or on the floor in the BM&FBOVESPA’s environment. Nowadays, the FX Clearinghouse settles transactions involving US dollar only, typically on T+2¹. PVP is observed, i.e. the national currency delivery and the foreign currency delivery are reciprocally dependent. For this purpose, BM&FBOVESPA monitors and coordinates the settlement process of both legs.

The clearinghouse acts as central counterparty. In each settlement cycle, net positions are settled:

To limit its exposure to settlement risks, the clearinghouse imposes operational limits to the participants, as well as requires collateral – mainly federal government securities – to cover the foreign exchange rate volatility. BM&FBOVESPA counts on liquidity lines contracted in both domestic and foreign currency to render the timely completion of the settlement cycle possible even in case of participant default. Furthermore, the clearinghouse has selected foreign correspondent banks with low credit risk, and has diversified its operations among them.

Acceptance of a transaction for settlement observes an automated process of analysis, which takes into consideration the net position traded by each participant, their respective operational limits, uncommitted collateral necessary to cover the foreign exchange rate volatility, and the reasonability of the contracted foreign exchange rate in comparison with the market average rate. If a transaction is contracted at a value out of usual range of prices, its acceptance depends on the additional collateral posted by the participant. The assets for collateral are daily marked to market.

At the end of trading session of the previous day, the clearinghouse informs the participants about their net positions to be settled on the following day. At the settlement day, participants with net debit positions, in domestic or foreign currency, must transfer the corresponding resources to the clearinghouse. For domestic currency, transfers are made by means of STR to the settlement account of the clearinghouse at the Banco Central do Brasil and, for foreign currency, to the clearinghouse account at the correspondent bank indicated by it³. At the time set in the system’s regulation, the clearinghouse processes the funds transfer to participants with net credit positions. This implies transfers in domestic currency, by means of STR, to participants with net short position in foreign currency and transfers in US dollar to participants with net long position in foreign currency, using Swift messages to order foreign transfers to its correspondent banks.

In case of default, the defaulting participant does not receive its respective currency amount and the clearinghouse uses the resources collected from the surviving party to the necessary purchase of currency, i.e. domestic currency or dollars, as the surviving counterparty is, in the original transaction, respectively, seller or buyer of foreign currency. This currency purchase is made through an outright transaction or a repurchase agreement, as the clearinghouse considers the participant in irregular situation respectively an actual defaulter or debtor for operational reasons exclusively.

To process a repurchase agreement, therefore subject to reversal, the participant considered operational debtor must deposit to the clearinghouse, up to the deadline set in the regulation, the amount related to the cost of this transaction⁴. In any event, the purchase of currency is made with the bank offering the best proposal among those previously contracted by the clearinghouse. The repurchase agreement will be converted into outright transaction if the defaulter, initially declared operational debtor, does not regularize its situation up to a pre-established deadline.

The clearinghouse will foreclose collateral posted by the defaulter in the amount sufficient to cover the foreign exchange rate variation, if exchange rate variation determines so (the surviving party is the buyer or the seller of foreign currency respectively when the foreign exchange rate depreciates or appreciates). In any event, on the contracted maturity date the surviving party receives its respective amount of currency. If necessary, the clearinghouse uses the previously contracted liquidity lines, in domestic or foreign currency according to the case

Banks and foreign exchange brokerage firms can participate in the clearinghouse subject to its evaluation. To act as settling agent, the participant must hold an account at the Banco Central do Brasil. The system comprises 70 settling banks and 22 brokers (September, 2009).

 BM&FBOVESPA maintains two processing centers located in Sao Paulo. In case of contingency, operation can be retaken at the secondary center, which operates in hot standby, in less then 30 minutes.

¹ OTC transactions can be settled either directly between the counterparties or through the FX Clearinghouse. In the former case, settlement in the national currency is made through STR, while settlement in foreign currency is made through foreign correspondent banks.

² Settlement on T or T+1 is possible as well.

³ Where both the clearinghouse and the participant hold account at the same correspondent bank, fund transfers can be made between accounts of such correspondent bank. On the other hand, when transfers involve different banks, they must be made through the funds transfer system operated by the Federal Reserve Bank (Fedwire).

⁴The requirement is always met in domestic currency. STR is used for the correspondent funds transfer.