In 2013, shortly after scandals involving the manipulation of exchange rates and interest rates became public, the International Organization of Securities Commissions (IOSCO) published a report in response to a consultation on rules applicable to financial benchmarks. Not surprisingly, concerns were raised about the fragility of certain benchmarks, particularly in terms of integrity and continuity.

In Brazil, in transactions carried out in the financial and capital markets, one of the benchmark parameters most commonly adopted is the Interbank Deposit (DI) rate. It serves as a benchmark for numerous bank loans (transactions between banks and clients), raising of funds through debentures, and various financial investments (e.g., DI funds), among other transactions.

In very simple terms, the rate (DI) used in all these situations derives from the interest rate used in interbank transactions. More specifically, the DI rate is calculated on the basis of interbank loans between institutions that are not members of the same conglomerate, based on pre-fixed rates and with a one-day term.

Therefore, determination of the DI rate for a date is always done according to certain procedures, through which a universe of eligible transactions is subject to scrutiny. The methodology used has remained fairly constant over time, although it has undergone occasional targeted improvements.

It so happens that, some years ago, there has been a significant reduction in the number of transactions carried out in the interbank market. In 2013, for example, when the DI rate began to show large deviations from the Selic rate (which traditionally accompanied it pari passu), this situation was officially recognized for the first time, and Cetip (succeeded by B3 - Brasil, Bolsa, Balcão S.A.) decided to change its calculation methodology, such that if, on a given day, there were less than ten transactions in the interbank market, the historical correlation between the DI rate and the Selic rate was used for the purposes of calculating the rate.

On October 1, 2018, following the recommendations of the Iosco (especially regarding the sufficiency of data for calculation of the benchmark, covered by Principle 7), the methodology for calculating the DI rate used by B3 was based on an observation, or lack thereof, of two conditions: (i) the number of transactions eligible for calculating the rate is equal to or greater than 100; and (ii) the sum of the volumes of transactions eligible for the rate calculation is equal to or greater than R$ 30 billion. The new rule, therefore, confers more transparency and robustness to the benchmark, which now depends on two variables: number and size of the transactions. Thus, if at least one of the two conditions above is not observed on a certain calculation date, the DI rate released will be equal to the Selic Over rate.

In view of this change, it may be possible to revisit the bases that led to the promulgation of the Superior Court of Justice's Precedent No. 176, of 1996, which states that "... a contractual provision is void that subjects the debtor to the interest rate disclosed by Anbid/Cetip," because this rate is supposedly "... submitted to the whim of one of the parties." This is because, with the new methodology, the risk that the DI rate may be manipulated is more remote, if not practically nonexistent.

Individuals and legal entities resident, domiciled or with headquarters in Brazil, as provided for in tax law, must report to the Central Bank of Brazil the assets and amounts held by them outside the country. The reporting is mandatory to those holding assets abroad (assets and rights, including corporate interests in companies, fixed-income securities, shares, real properties, deposits, loans investments, among others) amounting to or exceeding the equivalent to US$100,000.00 on December 31, 2018.

Furthermore, the individuals and legal entities mentioned above holding assets abroad must also deliver to the Central Bank of Brazil a quarterly report relating to assets held abroad on March 31, June 30 and September 30 of each year, in case the total amount of such assets amounts to or exceeds the equivalent to US$100 million.

The report referring to December 31, 2018 must be delivered by means of the Brazilian Capital Abroad (CBE) reporting form available in the internet website of the Central Bank of Brazil at: www.bcb.gov.br, from February 15th, 2019 through 6PM of April 5th, 2019.

The manual containing detailed information about the content and requirements of the reporting is also available in the website of the Central Bank of Brazil mentioned above.

The late delivery, lack of reporting, or the submission of false, inaccurate or incomplete information subjects the violator to the imposition of a fine by the Central Bank of Brazil of up to R$250,000 (two hundred fifty thousand Brazilian reais).

(CMN Resolution 3,854, of May 27, 2010, BCB Circular 3,624, of February 6, 2013, and BCB Circular 3,857, of November 14, 2017, as amended).

Presidential Decree No. 9,544/18, published on the last 30th, acknowledged the interest of the Brazilian government in having foreign ownership of up to 100% of the capital stock of Direct Credit Companies (SCDs) and Interpersonal Lending Companies (SEPs) authorized to operate by the Central Bank of Brazil (Bacen), also known as credit fintechs.

These types of financial institutions were recently created by Bacen, mainly to foster competition in the credit market and to legally support the growing evolution of the use of technology in the development of banking activities. Credit fintechs are subject to more lenient regulations as compared to those applicable to "traditional" financial institutions, acting exclusively via electronic platform.

In Brazil, foreign participation in the capital stock of financial institutions is authorized only if it is in the interest of the Brazilian government, in view of article 52, sole paragraph, of the Transitory Constitutional Provisions Act (ADCT). If, for example, a financial institution that has foreign participation in its capital wishes to initiate its activities in Brazilian territory, or a financial institution that already operates in Brazilian territory has an interest in receiving foreign investment, it must, in addition to obtaining authorization from Bacen, request an opinion from the government, through a decree by the President of the Republic, attesting to the interest of the Brazilian government in this foreign participation, in accordance with the procedure prescribed by Bacen Circular No. 3,317/16.

Under Decree No. 9,544/18, the national interest in foreign participation of up to 100% in credit fintechs is automatically recognized, which makes the authorization process more agile and efficient, since an opinion by the presidency of the Republic in each specific case is avoided.

The issuance of the decree was a significant step forward in the effective practical implementation of the BC+ Agenda, inasmuch as it eliminated a time-consuming and costly legislative step that until today needed to be met for any foreign investment in the credit fintechs regulated by Bacen.

Since the process for operating authorization for credit fintechs is faster than that of "traditional" financial institutions, because of the very nature and the limited scope of these companies, it made perfect sense that this requirement for the authorization process also be simplified. The measure will serve as a catalyst for potential new investments in these types of financial institutions, which will likely also contribute to the emergence of more players in this segment, thereby creating more competition and reducing the cost of credit for the end customer.

Resolution No. 4,662 of the National Monetary Council (CMN), issued on May 25 of this year, provides for the requirement of a bilateral margin of guarantee on transactions with derivative financial instruments carried out in Brazil or abroad by financial institutions and other institutions authorized to operate by the Central Bank of Brazil (Bacen).

The new rules converges with the improvements applied to the derivatives market since the global financial crisis of 2008 and with the recommendations by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) for transactions with derivatives conducted in over-the-counter markets.

Resolution No. 4,662/18 does not apply: (i) to derivative transactions settled through an entity that intervenes as a central counterparty, if that entity: a) is a clearing house and a clearing and settlement service authorized by Bacen, in accordance with Law No. 10,214/01 and the regulations in force; b) is recognized as qualified by Bacen, pursuant to Circular No. 3,772/15; or (c) complies with the rules that are in accordance with the principles established by the Committee on Market Payments and Infrastructure (CPMI) and by IOSCO; (ii) to derivative contracts with delivery of a physical commodity, except for gold; and (iii) transactions carried out within the scope of the Brazilian foreign exchange market dealt with in Resolution No. 3,568/08.

According to the new resolution, financial instruments that possess all of the following characteristics are derivatives: (i) variable market value as a result of changes in a certain interest rate, price of a financial instrument, commodity price, exchange rate, price index or rate, credit rating or index, or other similar variable, provided that, in the case of a non-financial variable, it is not specific to one of the parties to the contract ; (ii) no or a small initial net investment in relation to the value of the contract; and (iii) settlement {liquidation} carried out on a future date.

On the other hand, the following shall not be considered "hedged transactions": (i) derivative financial instruments included in the portfolio of assets of a Real Estate Guarantee, as referred to in Resolution No. 4,598/17; (ii) derivative financial instruments between institutions that are members of the same prudential conglomerate; (iii) forward contracts for currencies with physical settlement (FX forward); and (iv) physical currency swap contracts (FX swap).

The requirements of the initial margin and the variation margin established in the context of derivative transactions must be observed both by the "covered institutions" and by the "covered counterparties".

Covered institutions are defined as institutions authorized to operate by the Central Bank that, individually or jointly with the other entities that are part of their operating group, average aggregate notional value of derivative transactions higher than R$ 25 billion. Covered counterparties are defined by the rule as: a) the covered institution and any entity that is part of its operating group, as defined in the rule; and b) any other entity that has, individually or jointly with the other entities that are part of the operating group to which it belongs, a notional average aggregate value of derivative transactions in excess of R$ 25 billion.

By seeking to ensure a high level of security for derivative transactions, the rule also provides general prohibitions on the guarantees established in the scope of these transactions. One of these prohibitions applies to the sale or re-use of financial instruments received as collateral for any other purpose, including the creation of a guarantee of new transactions by the receiving counterparty. In addition, it is mandatory to segregate the financial instruments used as the initial margin guarantee for the assets of the guarantor and the guarantee, thus ensuring their timely availability in the event of insolvency, bankruptcy, or dissolution by the competent authorities.

In order for all players involved in transactions of this nature to be able to adapt to the new rules, they will only be applied to covered transactions as of September 1, 2019.

Heritage funds, also known as endowments or philanthropic funds, have recently been regulated by Presidential Decree No. 851, of September 10, 2018.

These funds are sets of private assets organized, managed, and administered by an asset management organization with the purpose of providing a long-term funding for the supported institutions or the institutions holding the funds. As a general rule, only proceeds of the donations are applied to projects. The fund serves as a regular and stable source of funding for institutions whose purpose is the development of education, science, technology, research and innovation, culture, health, environment, social assistance, and sports activities. For the time being, such institutions may be public or private non-profits.

The regulation delimited the areas of activity of the institutions supported and left out, for example, human rights. Agents involved in the legislative process of the MP suggest the linking of areas of activity according to the broader scope of article 3 of Law No. 9,790, of March 23, 1999 (the OSCIPs Law).

Nonetheless, the MP has made important advances in encouraging donations in Brazil by improving the corporate governance of the fund management organization, therein providing for a separation of responsibilities between those who manage the fund and the institution supported. Also within the scope of corporate governance, the fund's management organization must include in its bylaws, among other things: 

  1. which institutions are supported, and a qualified quorum is needed to change them;
  2. the obligation to set up a board of directors (CA) and an audit committee (CF) and, for heritage funds with assets over R$ 5 million, investment committees (CI), as well as the rules of composition, competencies, form of election, or nomination of their members and the possibility regarding whether donors may sit on such bodies;
  3. the form of approval of policies of management, investment, redemption, and use of the funds of the heritage fund; and
  4. prohibition on the allocation of funds for purposes other than those provided for in the bylaws and the granting of guarantees to third parties using the assets owned by the heritage fund. 

The regulation also obliges heritage funds to adopt internal mechanisms and procedures of integrity, auditing, and incentives for reporting irregularities, as well as the preparation of codes of ethics and conduct for managers and employees. Fund management organizations with shareholders' equity exceeding R$ 20 million must have their financial statements submitted to independent auditors.

The MP also provides that the CA should be composed of at least two independent directors and a maximum of seven members for a term of two years, with the possibility of renewal. The MP provides that it is the responsibility of the CA to deliberate on amendments to the bylaws, contrary to the Civil Code, which considers the general meeting exclusively competent in this regard. Another important measure of transparency for investors is the provision that individuals or representatives of donor legal entities representing more than 10% of the total composition of the fund may participate in deliberative meetings of the CA as observers.

The CI, to be appointed by the CA, is responsible for recommending to the CA the investment policy and the rules for the recovery and use of funds, to coordinate and supervise the actions of those responsible for managing funds, and to prepare an annual report on the management of funds. Another important advance of the MP for the professionalization of management of heritage funds is the possibility of hiring, by the management organization, of an entity to manage funds registered with the Brazilian Securities and Exchange Commission (CVM), allowing for the payment of a performance fee.

The CF must be composed of three members nominated by the CA, and members who sat on the CA may not be nominated. The members of the CA, CF, and CI may be remunerated at an amount limited to the highest remuneration of the highest-ranking leader of the institution supported.

Despite the many positive aspects of corporate governance, there is a tightening and bureaucratization of the structure that may increase costs and inhibit donations from large fortunes. It should be observed that there is room for simplification of the governance structure.

It is important that the optional executive body of the executive organization be a non-profit institution or an international entity recognized and represented in Brazil, which is engaged by the managing organization to assist and coordinate the supported institution in the development of projects and programs.

The new rule regulates the relationship between the supported institution and the management organization, therein requiring the execution of a partnership instrument and the execution of programs, which must establish, respectively, (i) the cooperation link between them and determine the purpose of the public interest to be supported; and (ii) how the funds will be spent.

The MP was published days after the fire at the National Museum of Brazil in Rio de Janeiro and, in order to alleviate the tragedy, included permission for a larger percentage of the donations, not just their income, to be invested in the recovery or preservation of works and heritage and in emergency interventions to maintain the services provided by the supported institution.

One of the main innovations of the MP is the matching of financial donations to management organizations that support cultural projects to donations made to cultural projects for the purposes of article 3 of Law No. 8,313, of December 23, 1991 (the Rouanet Law), it being possible to deduct income tax of up to 6% for individuals and up to 4% for legal entities. The limitation of such tax benefit to only cultural projects may have a perverse effect by inhibiting investments in other areas covered by the heritage funds.

It should be noted that, according to Law No. 9,249, of December 26, 1995, and Presidential Decree No. 2,158-35, dated August 24, 2001, the donor legal entity taxed per the actual income regime may deduct the amount of the donation up to the limit of 2% of operating income, in the case of donations to civil society organizations (OSCs). The extension of this benefit to heritage funds would enable the search for new potential sources of funding for such organizations, which mostly work in the aforementioned social areas, delimited by the MP itself.

It is also observed that, in the State of São Paulo, the Tax on Transferences Causa Mortis and Donation of any Assets or Rights (ITCMD) is the responsibility of the grantee, therein applying a rate of 4% (the maximum rate established by the Federal Senate is 8%) over the amount donated. Entities whose social objectives are to promote human rights, culture, or the environment are exempt from this tax. Pursuant to the terms of article 4, item IV, of Decree No. 46,655/02, the ITCMD does not affect the transfer of assets and rights to the equity of educational and social assistance institutions that enjoy immunity only in relation to assets linked to essential purposes, which do not include assets for use as a source of income.[1] 

Considering that the ITCMD would be applicable to donations to funds and, in most cases, to donations from funds to supported institutions, there is debate regarding possible exemption from the ITCMD in donations to OSCs and heritage funds. According to a study by a researcher with FGV, Rafael Oliva, and the report Sustentabilidade econômica das organizações da sociedade civil – Desafios do ambiente jurídico brasileiro atual ["Economic Sustainability of Civil Society Organizations - Challenges in the Current Brazilian Legal Environment”], FGV Direito SP, the funds raised with ITCMD, including inheritances and donations, correspond to 1 % of net current revenue. By separating the amount raised with ITCMD from the taxable event, it is possible to find that 52% comes from donations, and only 1% of the total collected, or 0.0168% of the net current income of the state, without separating from this amount donations to OSCs.

The MP already has 114 suggestions for amendment. To organize advocacy with respect to the topic, the Institute for Development of Social Investment (IDIS) launched the Coalition for Philanthropic Heritage Funds, of which Machado Meyer is a signatory. Three of the main purposes of the initiative are (i) to expand the area of ​​activity of the supported institutions (article 3 of the OSCIPs Act), (ii) extend the MP tax benefit for all causes; and (iii) reduce governance constraints for managing organizations, in order that large fortunes not be discouraged from donating.


[1] SPALDING, Erika. Os Fundos Patrimoniais Endowment no Brasil [“Endowment Heritage Funds in Brazil”]. São Paulo, 2016.