Derivatives Laws and Regulations for Alternative Asset Managers

Brazil hosts a well-established exchange market for derivative products, while an OTC market is developing and ripe with opportunity. According to public data, all exchange-traded derivatives correspond to approximately a US$ 4.1 trillion market, which is centered on B3 S.A. – Brasil, Bolsa, Balcão (“B3”), the main financial market infrastructure in Brazil; B3 operates a variety of business lines, including the only authorized exchange in the country and a clearinghouse acting as central counterparty (CCP) to trades executed on such exchange. The OTC local market displays a modest size of approximately US$ 0.4 trillion, although a series of changes in law as well as innovative business models are setting the stage for growth in scale and complexity for the years ahead.[i] In spite of such differences between market segments, no one doubts that Brazil is a fertile ground for risk management tools owing to the historical dependency on the export of commodities and import of industrialized products, as well as the typical volatility of an emerging country where topics like inflation, high interest rates and swift changes in FX rates are commonplace to every businessperson. Another feature is that the aggregated hedging demand of Brazilian companies exceeds the current size of the local derivatives market. This occurs as large hedgers frequently seek pools of liquidity in offshore markets (like London or Chicago), while some others rely on alternative instruments that ensure price protection albeit not treated as derivatives under Brazilian law.[ii] Product-wise, Brazil’s markets include the major building blocks (options, forwards, futures and swaps) as well as a wide range of underlyings (from agricultural items to financial indexes and even certain digital assets). In the OTC space, there is plain-vanilla hedging and some bespoke derivatives, while the market for credit default swaps is virtually non-existent. A wide regulatory reform of credit derivatives has just been implemented, and the industry is now working on standards and a credit derivatives determinations committee, so a novel field may be expected to emerge soon. Market participants span across a diverse group of institutional players (including non-resident investors, banks, broker-dealers, insurers, pension funds and asset managers), as well as exporters and other non-financial companies demanding hedge and, in certain cases, even retail investors and high-net worth individuals. As further discussed below, transparency is another distinguishing feature of the Brazilian market, since the vast majority of the trading volume is executed on a single exchange (hence, is subject to oversight by regulators), and banks as well as broker-dealers have been legally required to report their OTC derivatives to trade repositories since the year of 1994. [i] Estimated market values date from 30 June 2025 and had been converted to U.S. dollars (US$) from Brazilian reais (R$) at an exchange rate of US$1:R$5.60. See item 2.5 (Derivatives – Notional Outstanding) (right click and then select “show as table”) of the Economic Bulletin (interactive version) of the Brazilian Securities Commission (CVM). Available at this Link. [ii] For instance, the so-called Rural Product Note (Cédula de Produto Rural – CPR) is regulated in Brazil as a note rather than a derivative, even though it is functionally similar to a commodity prepaid forward that may be cash or physically settled. Likewise, FX hedging in connection with international trade is typically executed in Brazil in the form of a derivative or an FX transaction for future delivery—in industry parlance, an FX lock (trava cambial); this latter instrument is only subject to the FX regulations but may be seen on the substance as akin to an FX forward with physical delivery.