Brazil: The Brazilian Monetary Council changes again the rules on Financial Bills

By means of Resolution No. 4123, of August 23, 2012 (Res. 4123/2012), the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) amended and consolidated the rules on the issuance of Financial Bills (Letras Financeiras – LFs) by the authorized financial institutions.

The LF was created by Provisional Measure No. 472, of December 15, 2009, which was approved by the Brazilian Congress and converted into Law No. 12249, of June 11, 2010 (Law 12249/2010), and is also governed by the legislation applied to the other Brazilian credit instruments1 to the extent that such legislation does not conflict with the provisions of Law 12249/2010. It is a credit document that constitutes a promise of payment in cash, issued in the registered form, which may be transferred to third parties and it is freely negotiable. It must be exclusively issued in book-entry form, through the registration in a registry and financial settlement of assets system authorized by the Central Bank of Brazil (Banco Central do Brasil – Bacen).

The LF must contain the following characteristics: (i) the title "Letra Financeira"; (ii) the name of the financial institution, which is the issuer; (iii) the number of order, the place and the date of issuance; (iv) the par value; (v) the applicable interest rate, which may fixed or floating, being admitted the capitalization of interest; (vi) the exchange correction clause (if any); (viii) other forms of remuneration, including those based on an index or a rate of public knowledge (if any); (ix) the subordination clause (if any); (ix) the maturity date; (x) the place of payment; (xi) the name of the person to whom it should be paid; (xii) the description of the in rem or personal guarantee (if any) and (xiii) the periodical payment of earnings clause (if any)2.

The main goal of the new regulation issued by CMN is to expand the use of LFs as an instrument of long-term funding and create conditions for the development of a secondary market for these papers. The rules were relaxed to stretch the maturity terms of LFs and at the same time improve the conditions of fundraising for financing in infrastructure works. Although the new rules are more flexible, Bacen intends to monitor the LFs with caution, because these credit documents are exempt from compulsory payment (depósito compulsório) and have no coverage of the Brazilian Credit Guarantee Fund (Fundo Garantidor de Créditos - FGC).

The institutions authorized to issue LFs are the following: (i) multiservice banks (bancos múltiplos); (ii) commercial banks (bancos comerciais); (iii) development banks (bancos de desenvolvimento); (iv) investment banks (bancos de investimentos); (v) savings banks (caixas econômicas); (vi) mortgage companies (companhias hipotecárias); (vii) loan, finance and investment companies (sociedades de crédito, financiamento e investimento); (viii) real estate loan companies (sociedades de crédito imobiliário); and (ix) the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social – BNDES).

This list has now been increased with the addition of the development banks. In practice, this change should benefit basically three development banks, which are controlled by the State of Minas Gerais (Banco de Desenvolvimento de Minas Gerais S.A. – BDMG), the State of Espírito Santo (Banco de Desenvolvimento do Espírito Santo S.A. – BANDES) and the States of the South Region (Banco Regional de Desenvolvimento do Extremo Sul S.A. – BRDE), and can also issue LFs. The new regulation issued by CMN aims to help these development banks to maintain economic activity promotion projects guaranteed by such banks in the areas where they operate.

The issue of LFs by development banks must meet the conditions laid down in Res. 4123/2012 and in the specific regulation.

BNDES is authorized to issue LFs under the following conditions:

(i) the total aggregate amount to be issued is limited to the Capital Base (Patrimônio de Referência) value, level 1, of BNDES; and

(ii) preparation of a feasibility study, which should contain at least the economic and financial analysis on the use of the LF compared to other fund-raising alternatives and additional sources of funds available to BNDES, considering volume, term, fees, indexing, liabilities´ composition and other conditions of the issuance as well as the potential demand for long-term bonds and the planned destination for the proceeds.

The documents proving the above-mentioned feasibility study should remain available to Bacen for at least five years at the headquarters of the issuing institution.

The conditions of tradability of the LF in the market were also improved by the new regulation. The improvement is evidenced by the permission to issue LFs with repurchase and resale clauses and subordination clause (cláusula de subordinação). In addition, the exchange of LFs was allowed and the minimum par value by unit of LFs with subordination clause was reduced from R$ 300 thousand to R$ 150 thousand.

The LF cannot be issued with a par value by unit lower than: (i) R$ 300 thousand, if it contains subordination clause; and (ii) R$ 150,000, if it does not contain subordination clause. The concept of subordination clause is set forth by article 40 of Law 12249/2010 and means that the LF may be issued with subordination clause in relation to the unsecured creditors, with right of preference solely over the issuer´s shareholders to the remaining assets, if any, in the event of liquidation or bankruptcy of the issuing institution.

The vast majority of the financial instruments of this kind available on the market are composed by LFs without subordination clause. Now, a larger audience can acquire these papers, but the target audience will still be composed of qualified investors, because the minimum par value by unit of the LF without subordination clause remains the same (R$ 300 thousand).

The LF can pay interest rate fixed in advance, combined or not with floating rates3, or with a price index, observing the legal provisions and regulations applicable in each case. The issue with exchange variation clause is not admitted. Payments shall always have a minimum interval of 180 days.

The minimum maturity term of the LF is 24 months (i.e. two years). The partial or total redemption before the agreed maturity continues to be expressly prohibited.

The LF with a maturity exceeding 48 months (i.e. four years) that it is not remunerated based on the rate applied on the interbank loans (DI rate)4 may be issued with a repurchase option clause by the issuing institution or resale option clause to the issuing institution, combined or not with the modification of the LF´s financial burden if the option is not exercised. The first option date should observe the minimum agreed term. The interval between the option dates must be of at least 180 days. The repurchase option by the issuing institution of the LF subject to public offer must observe fair criteria, in the form of the special regulation enacted by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM).

Therefore, there was also a change in the rules for issuance of LFs with a term over four years. In this case, the authorized financial institutions may issue papers with resale and repurchase clauses so that the investors can exit this type of application more easily. This paper can pay periodic income every 180 days. This change aims to increase the average term of the LFs, which currently stands at 2.3 years.

The new regulation also allows the public offer of LFs with subordination clause, which was previously expressly prohibited. However, as already mentioned, the minimum par value per unit of R$ 300 was maintained in the case of the LFs with subordination clause.

Any institution authorized to issue LFs can exchange LFs of its own issuance at any time by another LFs issued by it under the following terms and conditions: (i) the nominal par value per unit must be equal to or higher than the exchanged LF, but it is possible to exchange new LFs with a nominal par value per unit below of the original LFs, provided that the sum of these amounts be equal to or higher than the nominal par value per unit of the original LFs; (ii) with a maturity exceeding the remaining term of the exchanged LF, subject to the minimum time limit of 24 months; and (iii) in the same condition of subordination of the exchange LF, provided, however, that a LF without subordination clause may be exchanged by another LF with subordination clause.

This measure allows the authorized financial institutions to exchange LFs traded at a higher cost per others with longer maturities and more attractive rates.

The exchange transaction must be made at the exchanges or organized over-the-counter (OTC) markets. Pursuant to CVM Instruction No. 461, of October 23, 2007, the Brazilian regulated markets comprise organized markets of securities, meaning the physical space or electronic system designed for the negotiation or registration of operations with securities by a certain number of people authorized to trade, whether they are acting on their own account or on behalf of a third party. Organized markets of securities are the Stock Exchanges, Commodities and Futures markets and the organized OTC markets. These markets shall be administrated by managing entities authorized by CVM.

The LFs without subordination clause may be acquired by the issuing institution at any time, provided that the transaction is made at the exchanges or organized OTC markets, to be kept in treasury and to be subsequently sold, up to the limit of 5% of the total LFs issued without subordination clause. The LFs without subordination clause acquired by third parties from the financial institutions of the same economic conglomerate must be computed in this 5% limit. The concept of same economic conglomerate used herein has the same meaning adopted by Bacen for the purposes of defining "consolidated financial statements of entities of the same group", which comprises the equity participations in companies located in Brazil and abroad which hold, directly or indirectly, solely or jointly with other partners, including by force of voting agreements, rights of partner which grant: (a) prevalence on the corporate decisions; (b) power to elect or dismiss the majority of the administrators; (c) effective operational control, by means of the common administration or management; (d) corporate control, represented by the aggregated sum of all the equity participations held by the institution, regardless of the percentage, with those held by its administrators, controllers and related companies, as well as those acquired, directly or indirectly, through investment funds. It is also necessary to consider and include in the same category all the financial institutions and other entities accredited by Bacen linked by effective operation control or acting in the market under the same trademark or trade name, even when there is no equity participation whatsoever5.

The LF used for the purpose of capital formation of the issuing entity must comply with the conditions established by Res. 4123/2012 and the specific regulation.

Furthermore, the LF may be used for the performance of linked credit transactions (operações ativas vinculadas) funded with resources delivered or place at their disposal by third parties, as permitted by the current regulations6.

The linked credit transaction must comply with at least the following conditions: (i) the funding provided by the third party acting as creditor will have to be linked to the credit transaction made by the financial institution which is the debtor; (ii) the funds so raised will be subordinated to the flow of payments (interest and other charges) of the credit transaction; (iii) the remuneration of the linked credit transaction must be sufficient to cover the costs of the funding; (iv) the cash flow of both operations (credit transaction and funding) must be compatible; (v) the term of the funding must be equal to or exceeds the term of the credit transaction; (vi) any payment to the creditor, including interest or other charges or repayment of principal, will be postponed, in the event of default of the linked credit transaction; (vii) partial or total non-payment of principal and interest or other charges due to the creditor, in the event that the enforced guarantees are insufficient to settle the linked credit transaction, or in other situations whereby the transaction is not financially liquidated. Furthermore, the funding cannot be guaranteed by the financial institution which will receive the funds so raised to perform the linked credit transaction, or by any related person, i.e. any individual or legal entity who/which forms the same consolidated economic group as defined by Bacen.

In view of the need to adapt the systems of record to the new characteristics of the LFs, Res. 4123/2012 will come into force only on November 1, 2012.

Footnotes

1 The legislation relating to credit documents in Brazil is basically contained in the Civil Code. Supplementary material is also contained in the Bills of Exchange Law. This legislation has been amended in relation to certain credit documents as a result of the Uniform Law adopted by the international conventions at Geneva which was promulgated in Brazil by Decree No. 57595 of January 7, 1996 (checks) and Decree No. 57663 of January 24, 1966 (bills of exchange and promissory notes). On September 2, 1985, Law No. 7357 was enacted dealing with checks, based on the Uniform Law of Geneva.

2 Furthermore, the LF is an extrajudicial executive instrument, which may be executed regardless of protest based on a certificate containing all the informational data registration, issued by the entity authorized by Bacen to administrate the above-mentioned registry and financial settlement of assets system. Depending on the remuneration criteria, the LF may generate a redemption value inferior to its issuance value. Its transfer of ownership is made by through the above-mentioned registry and financial settlement of assets system and the entity authorized to administrate such system will have to keep in its registries all the historical sequence of trading of the LF.

3 Pursuant to CMN Resolution No. 1143, June 26, 1986, financial institutions are authorized to perform transactions at floating rates, which may be adjusted for fixed periods, provided that the term of the transaction is equal to or exceeds 180 days.

4 DI in Portuguese means Depósito Interfinaceiro, which can be translated into English as inter financial or interbank deposit. The money is borrowed via interbank deposit certificate (Certificado de Depósito Bancário – CDI). The applicable rate is known in Brazil as "taxa DI" and it is the average of the interest rates negotiated between the banks for short-term loans.

5 This definition is expressly set forth by article 3 of CMN Resolution No. 2723, of May 31, 2000, with the wording of CMN Resolution 2743, of June 28, 2000.

6 The linked credit operations are governed by CMN Resolution No. 2921, of January 17, 2002.

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 Topics
 
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions