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.

Footnotes

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Walter Stuber
Adriana Maria Gödel Stuber
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.