quinta-feira, 7 de fevereiro de 2013

Regulation of Hedging by Brazilian companies


This is an article I wrote to Alternative Latin Investor, and that was published December last year. 

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After 2005, the scope of hedging operations allowed to Brazilian companies has been extended considerably.  

Resolution 3.312 from the Brazilian Central Bank has allowed any individual or company domiciled in Brazil to remit funds abroad in order to hedge its investments or its usual business transactions.

In fact, article 1 of such resolution reads:

Article 1 To establish that the financial transfers to and from abroad, derived from operations designed  for the protection (hedge) of rights or obligations of commercial or financial nature, subject to risks of variation in the international market, of interest rates, of parities between foreign currencies or commodity prices, can be performed with banks authorized to operate in the foreign exchange market  by individuals or  legal  entities resident, domiciled or headquartered in Brazil, subject to the provisions of this Resolution.

The transfers must also be made through a bank authorized to work in Brazil. Further detailing of Resolution 3.312/95, established by the Brazilian regulation of currency Exchange markets and foreign capitals (RMCCI), also states that the intervening Banks must collect enough evidence of the legitimacy of the operation, as well as detailed client’s identification. Those precautions are part of Brazilian efforts to curtail Money laundering and corruption.

The Money transferences may have a variety of purposes. A Brazilian company may set up a bank account at a foreign bank, obtain loans abroad, and establish collaterals or escrow accounts abroad, inter alia.

The payment of exports in advance is also allowed, as are, in general, any other forms of natural hedging against foreign currency appreciation.

In spite of Brazil’s large base of exporters, the use of hedging has been restricted to the larger companies.  This is due to many factors. One will often hear complaints about the high cost charged by the Banks to organize and execute hedging operations. It is often said, too, that the lack of information about the availability of such remedies is a major setback, since a considerable share of Brazilian exporters is composed of medium companies that may not have knowledge about hedging operations.

The Brasilia tax system is also to blame. Since 1999, a misguided bill has imposed withholding taxation on the gains of derivatives or swap operations, even when they have been used specifically to hedge companies from risk. (LEI Nº 9.779, from January 19, 1999). Needless to say, this taxation has nearly made it impossible to hedge 100% of the losses due to currency appreciation or otherwise, since the gains obtained with the derivatives used to cover the losses with the main operation are now subject to taxation.

This issue has been discussed many times before Brazilian courts. Unfortunately, the Brazilian Superior Court of Justice (STJ) has decided for the applicability of the withholding tax and this understanding has little chance of being reverted.

Please notice that this refers only to the swap operations made by companies in its own benefit. The taxation of hedge funds follows different rules.

Significant losses suffered by two big Brazilian companies with derivatives have also created a negative bias in the market, directed at swap, derivatives and hedging operations.

In spite of all that, the use of hedging by Brazilian companies is bound to increase. Many studies have been published in Brazil, especially by agro business associations and by the Brazilian Central Bank, detailing this phenomenon. If not by exporting companies, then by large companies interested in protecting its financial investments.

It is clear that the use of international mechanisms is allowed for hedging purposes, as demonstrated in this article. Therefore, a clear opportunity is presented for those who can make the use of these financial products more accessible to the average Brazilian company. 


Adler Martins has teamed up with Alternative Latin Investor (ALI) to contribute to their cutting edge coverage of Latin America . 
Click here to read Adler’s article.
About Alternative Latin Investor: ALI is the first digital and print publication to offer highly coveted information and actionable analysis regarding alternative investments in Latin America. Topics include Wealth Advisory, Commodities, Forex, Private Equity, Wine, Art, Regulation, Philanthropy, Hedge Funds, Agribusiness, Renewable Energy, Emerging Markets and Real Estate.

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