Legal aspects

Legal aspects

Law 4,595 regulates the functioning of Brazilian financial system. It sets forth that the National Monetary Council - CMN is the entity in charge of elaborating the money and credit policy. CMN is also responsible for promoting the improvement of institutions and financial instruments to ensure higher efficiency of the payments system. Besides being the main component for the implementation of the CMN policy directives, it's up to the Banco Central do Brasil to authorize the functioning of financial institutions¹, supervise them, issue currency and carry out services related to currency in circulation. In addition, the Banco Central do Brasil is empowered to intervene in the financial institutions or place them under special administrative regimes, and to determine their extra-judicial liquidation (Decree-Law 2,321 and Law 6,024).

Law 10,214 is the main legal instrument for the Brazilian payment system. It sets forth among other things that:
·           it's up to the Banco Central do Brasil to define which systems are systemically important;
·           multilateral netting of obligations in a clearing and settlement system is admitted;
·           in systemically important system, the entity operating it must act as central counterparty and adopt mechanisms and safeguards that ensure certainty of settlement of the transactions;
·           assets posted as collateral to clearinghouses cannot be seized even by judicial order; and
·           the bankruptcy law does not affect the fulfillment by a participant of its obligations to a clearing or settlement system, which will be brought to completion and settled in accordance with the system regulation.

CMN's Resolution 2,882 sets forth core principles for the Brazilian payment system. These principles comply with recommendations made by BIS/CPSS through the report "Core principles for systemically important payment systems", as well with the CPSS/IOSCO joint reports "Recommendations for securities settlement systems" and "Recommendations for central counterparties". The mentioned Resolution empowers the Banco Central do Brasil to regulate, authorize and supervise the clearing and settlement systems. These activities are shared with the Comissão de Valores Mobiliários - CVM (Securities and Exchange Commission) in case of systems that settle securities².

The Banco Central do Brasil, in its capacity to regulate the functioning of clearing and settlement systems, has set forth, among other things, that:³
·           systemically important deferred settlement systems should promote the final settlement of net positions directly in accounts held at the Banco Central do Brasil;

·          all settlement systems that settle transactions with securities and other financial assets, including foreign currency and financial derivatives, are considered as systemically important, as well as the funds transfer systems presenting average daily turnover higher than 4% of the STR average daily turnover, or that, at the Banco Central do Brasil discretion, has the potential to pose risk to the smooth functioning of the Brazilian Payment System;
·           maximum settlement lag is: (1) at end of day for systemically important funds transfer system; (2) one business day for spot transactions with securities (except stocks); and (3) three business days for transactions with stocks carried out in stock exchanges. The settlement deadline in any other situation is established by the Banco Central do Brasil, which examines each particular case;
·           clearinghouses should keep Net Worth compatible to their risk exposure, observing a minimum limit of R$ 30 million for system considered systemically important and R$ 5 million for system that is not.

Checks are regulated according to the general principles of the Geneva Convention (Law 7,357). Financial relationship between economic agents, including issues related to funds transfers and clearing and settlement of obligations, are governed by contracts between parts, which are subject to requirements mainly of the Civil Code (Law 10,406), the Commercial Code (Law 556), the Securities Exchange Law (Law 4,728) and the so called “White Collar” Law (Law 7,492), besides Law 10,214. The relationship between financial institutions and their customers are also under the requirements of the Consumer Protection Law (Law 8,078).

¹ According to the legal framework in place, financial institutions are public or private legal entities whose main or accessory activity is collection, intermediation, investment of own or third-parties financial resources, in national or foreign currency, and custody of third-parties' values

² Settlement systems for either government securities or bank-issued bonds are under the supervision of the BCB only.

³ Circular 3,057, as amended by Circular 3,437.