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. The Banco Central do Brasil (BCB), under the CMN policy directives, is responsible to authorize the functioning of financial institutions1, supervise them, and issue currency. In addition, the BCB is empowered to intervene in the financial institutions or place them under special administrative regimes, and to determine their compulsory 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 is the BCB's responsability to define which systems are systemically important2;
        • multilateral netting of obligations in the clearing and settlement system is admitted;
        • the entities operating systemically important systems must act as central counterparty and adopt mechanisms and safeguards that ensure certainty of transactions settlement;
        • 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.

The Resolution 2,882 sets forth the core principles for the Brazilian payment system. These principles comply with recommendations made by BIS/CPSS and CPSS/IOSCO joint report "Principle for Financial Markets Infrastructure". The mentioned Resolution empowers the BCB to regulate, authorize and supervise the clearing and settlement systems. These activities are shared with the Securities and Exchange Commission (CVM) in case of systems that settle securities3.

The BCB, in its capacity to regulate the functioning of clearing and settlement systems, has set forth, among other things, that:4
        • systemically important deferred settlement systems should promote the final settlement of net positions directly in accounts held at the BCB;
        • are considered as systemically important all the settlement systems that settle securities and other financial assets, including foreign currency and financial derivatives, , as well as the funds transfer systems with average daily turnover higher than 4% of those of the STR, or that, at the BCB discretion, has the potential to pose risk to the smooth functioning of the Brazilian Payment System;
        • the 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 equities); and (3) three business days for transactions with equities carried out in stock exchanges. The settlement deadline in any other situation is established by the BCB, which examines each particular case;
        • clearinghouses should keep a net worth compatible with their risk exposure, observing a minimum limit of R$ 30 million for system considered systemically important and R$ 5 million otherwise.

The Brazilian payment system is subject to several other regulations, besides Law 10,214. The relationship between economic agents, including issues related to funds transfers and clearing and settlement of obligations, are governed by contracts between parts subject to 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). The relationship between financial institutions and their customers are also under the requirements of the Consumer Protection Law (Law 8,078). Checks are regulated according to the general principles of the Geneva Convention (Law 7,357).

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

2 Systemically important systems: settlement systems whose volume and nature, at BCB discretion, may create risks to the strength and to the smooth functioning of the Brazilian financial system.

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

4 Circular 3,057, as amended by Circular 3,437. See also Circular 3,100, as amended by Circulars 3,488 and 3,439.