The Foreign Exchange Clearinghouse, whose operations started on April 22, 2002, settles interbank ForEx operations performed at BM&FBOVESPA’s electronic platform (PUMA) and OTC market. The clearinghouse accepts only operations involving US Dollar, and the settlement is normally done on T+2, but can also be performed on T and T+1. The corresponding obligations are multilaterally offset, and BM&FBOVESPA acts as central counterparty through the payment vs. payment (PvP) principle. For that, the clearinghouse monitors and coordinates the settlement in both currencies, Brazilian Real (BRL) and US Dollar (USD).
In each settlement cycle, the offset operations are settled:
• For the BRL leg, in bank reserve accounts held by the participants at the Central Bank of Brazil;
• For the USD leg, in participants-held bank accounts in New York.
To limit its exposure to settlement risks, the clearinghouse imposes operational limits to its participants and requires collateral in BRL, USD or in Brazilian Treasury bonds to cover the volatility of the exchange rate. The assets pledged by participants are marked to market daily.
The clearinghouse has credit lines in BRL and USD, what makes it able to conclude timely the settlement cycle even if a participant defaults. In order to decrease its exposure to risks, the clearinghouse has selected overseas correspondent banks with low credit risk, diversifying its transactions among them.
The settlement of the transactions is primarily assured by the collateral deposited by the participants. If the resources obtained by its execution are not sufficient to settle their transactions, the residual value is shared between the banks that did not default on the day that the default occurred.
The acceptance of transactions by the clearinghouse, for settlement purposes, follows an automatic analysis process, which takes into account the net position already contracted by each participant, their operational limits, the pledged collateral not yet committed that is required to cover the exchange rate’s volatility, and the reasonableness of the contracted exchange rate compared with the average rate. If a transaction is contracted out of the ordinary price range, its acceptance is conditioned upon the submission of additional collateral by the participants.
On the settlement day, participants with net debit positions in BRL and in foreign currency should transfer the corresponding resources to the clearinghouse until 1:05pm. Regarding the BRL leg, the transfers are made through the STR to the clearinghouse’s settlement account at the Central Bank of Brazil. On the foreign currency leg, the transfers are performed to the clearinghouse’s account in a correspondent bank. At 2:05pm (UTC-3), through the STR, the clearinghouse transfers the funds in BRL to the participants with long net positions in BRL (and short net positions in foreign currency). At the same time, through SWIFT messages, the clearinghouse transfers the funds in USD to the participants with long net positions in USD.
If the participant fails to meet any financial obligation, i.e., he fails to deliver the proper amount of BRL or foreign currency, the participant is labeled as operational debtor or defaulter, if the non-payment, according to the clearinghouse, is due to operational problems or financial insufficiency, respectively. In any case, the problem should be solved up to 3:30pm (UTC-3). In both cases (operational debtor and defaulter) the participant in irregular situation won’t receive what is owed to him and the clearinghouse will use the collected resources by the compliant participant to purchase the required currency.
This purchase of currency is performed definitely or with a reverse repo agreement, whether the participant was labeled defaulter or operational debtor, respectively. In order to perform the reverse repo agreement, the operational debtor should pay to the clearinghouse the costs of the operation through the STR, in Brazilian Real and up to 1:15pm (UTC-3). In any case, the purchase of currency will be made through the bank with the highest bid. The purchase with reverse repo will be transformed in a definitive purchase if the irregular participant, previously declared as operational debtor, doesn’t regularize its situation until the time limit determined by the clearinghouse.
In the eventuality of non-payment by a participant, the clearinghouse may execute the defaulter’s collateral up to the required amount to cover the unfavorable variation of exchange rate to the compliant participant. Anyway, in the same contracted settlement day, the compliant participant will receive his resources and, if necessary, the clearinghouse will resort to previously contracted liquidity funds in BRL or in USD, as appropriate.
Among the entities able to be participant at the clearinghouse are banks and brokerage companies authorized to operate in the exchange market. While banks are allowed to operate both in trading and post-trading, brokerage companies can operate only in trading market, and therefore should appoint a bank with banking reserve account for the post-trading.
For further information, please access BM&FBOVESPA’s website (this link will open in a new window).