Brazil: New Developments On Repo Operations With Brazilian Fixed Income Securities

On December 15, 2011, the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) issued CMN Resolution No. 4040 (CMN Res. 4040/2011), which amended CMN Resolution No. 3339, of January 26, 2006 (CMN Res. 3339/2006), governing repo operations (operações compromissadas), also known as repurchase or buyback transactions, involving certain fixed income securities in Brazil. The main features of these transactions are outlined herein.

The different types of repo operations contemplated in the current regulations comprise the sale with promise to buy back or the buy (purchase) with promise of resale and the forward transactions, whose relevant terms and conditions are listed below.

The sale with promise to buy back or the buy with promise of resale shall be made: (a) intraday, overnight or with a maturity greater than one day; (b) with or without freely tradable securities; (c) matched, i.e. buyback to resale, allowing securities lending of bonds by the Central Bank of Brazil (Banco Central do Brasil – Bacen).

Forward transactions can be structured as follows: (a) buy or sale operations; (b) overdraft or not; (c) linked to cash buyback or resale.

The permitted fixed income securities for repo operations are the following: (i) federal government bonds issued by the Brazilian Treasury Secretariat (Secretaria do Tesouro Nacional – STN) or Bacen; (ii) STN securitized credits; (iii) state and municipal bonds; (iv) Agricultural Debt Securities (Títulos de Dívida Agrária - TDA) issued by the Brazilian National Institute of Colonization and Agrarian Reform (Instituto Nacional de Colonização e Reforma Agrária – Incra); (v) Bank Deposit Certificates (Certificados de Depósito Bancário – CDB); (vi) Banking Credit Notes (Cédulas de Crédito Bancário – CCB); (vii) Banking Credit Note Certificates (Certificados de Cédulas de Crédito Bancário – CCCB); (viii) Bills of Exchange (Letras de Câmbio – LC) with the acceptance of financial institutions; (ix) Mortgage Bills (Letras Hipotecárias – LH); (x) Real Estate Credit Bills (Letras de Crédito Imobiliário – LCI); (xi) Real Estate Credit Certificates (Cédulas de Crédito Imobiliário – CCI); (xii) Debentures (Debêntures); (xiii) Debentures Notes (Cédulas de Debêntures); (xiv) Commercial Paper (Notas Comerciais); (xv) Real Estate Receivable Certificates (Certificados de Recebíveis Imobiliários – CRI); (xvi) Rural Product Notes, with financial settlement (Cédulas de Produto Rural com Liquidação Financeira - CPR); (xvii) Certificates of Agribusiness Credit Rights (Certificados de Direitos Creditórios do Agronegócio – CDCA); (xviii) Agribusiness Credit Bills (Letras de Crédito do Agronegócio – LCA); (xix) Certificates of Agribusiness Liabilities (Certificados de Recebíveis do Agronegócio – CRA); (x) Export Notes (Cédulas de Crédito à Exportação – CCE); (xi) Export Credit Notes (Notas de Crédito à Exportação – NCE); (xii) other securities that may be authorized by Bacen.

One of the counterparts of the repo operation must be a financial institution or any other entity duly authorized by Bacen, including a brokerage house or a securities dealership company.

The maturity of transaction must always be equal or inferior to the redemption maturity of the securities used in the repo operation.

The fixed income must be a defined rate of return or floating, with established remuneration parameter. The use of a currency realignment clause is prohibited, except in the case of securities based-currency adjustment forward operations.

CMN Res. 4040/2011 establishes that securities that are object of a repo resale can be freely traded provided that the following conditions are met: (i) there is a freely tradable agreement entered into between the parties; and (ii) the transaction must be settled in a system of registry and financial settlement of assets authorized by Bacen or by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) and managed by a clearinghouse or a service provider that acts as a central counterparty and guarantees the settlement of the transactions made with its intervention.

This second condition does not apply to repo operations entered into between financial institutions or that are made with public securities issued by STN or Bacen regardless of the contracting parties.

Previously, before the enactment of CMN Res. 4040/2011, financial institutions could only trade private fixed income securities received in repo operations (with a commitment to repurchase) if and when the transaction was to happen in a central counterparty environment. This requirement limited the transactions to the Securities Clearing House (Câmara de Ativos) of the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros - BVMF).

Now, after the change, these transactions may also occur in the 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. CETIP does not act as a central counterparty.

For CMN if the repo operation is carried out between two financial institutions, there is no need to settle it in a central counterparty, because each financial institution knows the risk represented by its financial institution counterpart. This change permits the settlement in CETIP and meets an old demand of the financial institutions, aiming to increase the trading with private fixed income securities and providing for greater liquidity of the financial institutions´ portfolios.

The new regulation approved by CMN Res. 4040/2011 will not increase the systemic risks in the Brazilian Financial System. After carefully considering the matter, CMN concluded that the risk in these repo operations is perfectly measurable and it is part of the day-to-day activities of financial institutions.


1 A CDB is a nominal promise of payment of the original deposited amount plus an agreed remuneration, which just be nominative and endorsable, issued by a multiple bank (with commercial portfolio, of investment and/or development), a commercial bank, an investment bank, a development bank or a savings institution.

2 A CCB is a promise to pay in cash, arising from a credit operation, issued by a company or an individual, having a bank as a counterpart.

3 A CCCB is a security representing the CCBs held by a financial institution, which may represent notes of different values, periods and terms of remuneration, issued by the depositary institution for the CCBs.

4 A LC is linked to the financing of goods and services for an individual or a legal entity, having as acceptor a credit, financing and investment company or a multiple bank with credit, financing and investment portfolio.

5 A LH can only be issued by an institution that grant loans using resources from the Brazilian Housing Financial System (Sistema Financeiro de Habitação – SFH), it is guaranteed by mortgage credits as collateral, and may rely on additional fidejussory guarantee from a financial institution.

6 A LCI is pegged to real estate loans guaranteed by mortgage or by the property´s deed of trust, issued by a commercial bank, a multiple bank with a real estate lending portfolio, the Federal Savings Bank (Caixa Econômica Federal – CEF), a real estate credit company, the Savings and Loan Associations (Associações de Poupança e Empréstimo – APE) or a mortgage company.

7 A CCI is issued by a real estate creditor and may be whole, when it represents the entire loan amount, or a part, if it represents a portion of it, in which case the sum of the CCI parts cannot exceed the total loan amount they represent.

8 A Debenture is a security issued by a publicly-held or privately-held corporation (sociedade anônima) representing medium and long term debt that guarantee its owner (the debenture holder) right of credit against the issuing company.

9 A CD is a bank-issued security pegged to debentures, with its own guarantee, which gives its holder credit rights against the issuer.

10 The Commercial Paper is issued by a publicly-held corporation, giving its holder credit rights against the issuer.

11 The CRI is issued by a company securitizing real estate credits or a publicly-held corporation, pegged to real estate receivables, which constitutes a promise of payment in cash.

12 The CPR is an order instrument with physical (delivery of products) or financial settlement, issued by rural producers and their associations, including cooperatives.

13 The CDCA is issued by cooperatives of rural producers and other companies with agribusiness-related operations, pegged to agribusiness credit receivables.

14 The LCA is a credit instrument issued by a public or private financial institution, pegged to agribusiness credit rights.

15 The CRA is issued by companies securitizing agribusiness credit receivables.

16 The CCE and NCE are debt instruments linked to exports. The Export Note is a credit right in foreign currency, generated in sales contract of merchandise and of services abroad and is issued by an exporting company.

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.

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Walter Stuber
Adriana Maria Gödel Stuber
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