Innovations in Brazilian ETFs

Alexei Bonamin	Marcus Vinicius Fonseca

Exchange traded funds (ETFs) were established in Brazil through instruction number 359 of January 22 2002, enacted by the Brazilian Securities Commission (CVM), but until recently it was only possible to form an ETF backed by variable-income indices. Now, through the enactment of instruction number 537 of September 16 2013, which amended instruction number 359, the CVM has finally authorised the formation of ETFs backed by fixed-income indices.

Instruction 537 also provides criteria that should be observed by the CVM when approving indices that may be used as reference by an ETF, which always existed but were not yet detailed. For example, indices should not have parties related to the administrator or manager of the ETF as provider, and must have a widely disclosed calculation methodology that includes predetermined and objective rules.

Another innovation from instruction 537 is the establishment of a cash creation mechanism that allows the ETF manager to accept money as payment in full for subscribed funds' shares, or even to use money in the redemption of shares. This will certainly benefit investors as only individual assets were accepted before.

Brazilian ETFs are not yet allowed to invest abroad, although there is an expectation that the CVM will soon initiate a discussion to enable this type of investment.

Alexei Bonamin and Marcus Vinicius Fonseca

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