On November 20, 2013, the Board of the Central Bank of Brazil (Banco Central do Brasil – Bacen) issued the two Circulars mentioned herein, about certain issues of the Structured Operations Certificates (Certificados de Operações Estruturadas – COEs), created by Law No. 12,249, of June 11, 2010, and regulated by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) Resolution No. 4,623, of September 5, 2013: (a) Bacen Circular No. 3,684 – that establishes standardized methodology for performing sensitivity analysis of the market value of the COE, for information purposes to the registry system administrator; and (b) Bacen Circular No. 3,685 – that establishes criteria for evaluation of the relationship between the initial investment in COE and their potential results.

For the purposes of performing such sensitivity analysis, the financial institution issuer of the COE must estimate the percentage variation in the market value of the certificate, corresponding to: (i) parallel shocks of 50 basis points (negative) and 200 basis points (positive), in terms of annual fees for the underlying asset represented by interest rates and price indices; and (ii) shocks of 5% (negative) and 20% (positive) on the value of the underlying asset, for the other cases. In addition to these values, the issuer must inform the registry system administrator about the underlying asset of the certificate used in the sensitivity analysis. In the case of a COE benchmarked in more than one underlying asset, only the results from shocks performed on its main underlying asset must be informed.

Such information must be forwarded to the registry system administrator until the third business day following the last day of the month. The procedures used in the sensitivity analysis must be consistent, subject to verification and documented. The same information will have also to remain at the disposal of Bacen for a period of at least 10 years, counted from the maturity date of the COE.

The criteria for evaluation of the relationship between the initial investment in COE and their potential results are the following: (i) the issuance of the COE must have as main characteristic the fundraising on the part of the issuer; (ii) the issuance of the COE cannot work at any time in the issuer exposure to the credit risk of the holder of the certificate; (iii) the profitability of the COE should be expressed as a proportion of the value of the initial investment; (iv) when the COE is issued the scenarios that provide for full payment null or irrelevant in relation to the initial investment should reflect extreme conditions of very reduced probability; and (v) the results to be used for comparison purposes with the initial investment must be compatible with the period of a year or the term of the COE, whichever is less.

The issuer is responsible for the procedures used to meet such criteria and they must be made on the basis of consistent and verifiable methodologies. The information, methodologies and procedures used for the evaluation and compliance with those criteria will have to remain at the disposal of Bacen for a period of at least 10 years, counted from the maturity date of the COE.

Both Circulars shall enter into full force and effect on January 6, 2014.

1 The COE must be issued exclusively in book-entry form, through the registration in a registry and financial settlement of assets system authorized by Bacen or the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM). At the moment, the only entities authorized by Bacen and CVM are CETIP OTC Clearing House (CETIP S.A. - Balcão Organizado de Ativos e Derivativos - CETIP), which is the leading clearing house and central securities depository and derivatives registrar for operations carried out in the over-the-counter (OTC) market and the Derivatives Clearing House (Câmara de Derivativos) of the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros - BM&FBovespa).

2 Regarding the underlying assets, the COE can be referenced in price indices, bond indexes, securities indexes, interest rates, exchange rates, securities and other underlying assets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.