This content is from: Local Insights

New rules for securitisation funds in Brazil

Antonio Felix de Araujo Cintra
The Brazilian credit securitisation industry has developed at an amazing rate in recent years. Since the enactment of Instruction CVM No. 356, which set out the rules for the organisation and operation of securitisation funds in Brazil (the so-called FIDCs), credit securitisation transformed itself from being an exotic financial product into one of the first alternatives sought by companies looking for possible general capital funding.

At a time when interest rates were still very high in Brazil, the creation of FIDCs enabled companies to sell their trade receivables to raise working capital at more accessible rates. The same mechanism was quickly adopted by smaller banks, which sold their car and consumer loan portfolios to FIDCs to be able to continue to make new loans without breaching their capital requirement rules established by the Central Bank. In addition, FIDCs were also created to provide financing for small and medium-sized suppliers of large corporations and to purchase non-performing loans, precatórios (payment obligations of the Brazilian public sector) and other types of credits, creating a very useful secondary market for all kinds of credits.

The success of the FIDCs derived not only from the demand for such type of structure that existed in the Brazilian market at the time of their creation, but also from the features of the FIDCs themselves. There are several main features that provide comfort to investors.

One of the main positive features for investors is the fact that FIDCs are regulated in detail and subject to the supervision of the Brazilian securities regulator (the Brazilian Securities Commission, known by its acronym CVM). They are also very flexible instruments, making it possible to create different structures with subordinated, mezzanine and senior investors, which helps to target different pools of funds to match each specific transaction. It is also worth noting that the regulations require that the investment units of the FIDCs (known as quotas) are rated by independent rating agencies, and that the assets purchased by the FIDCs are kept in custody by financial institutions. Another comfort provided to investors is the fact that FIDCs are ultimately controlled by the holders of their quotas, meaning that they have the right to vote, among several other matters, to replace the manager of the fund in case they are not satisfied with its performance.

Notwithstanding the success of the FIDCs, the CVM has decided recently to change the regulations to amend certain of their features to provide more security to investors. The main purpose of the proposed new rules is probably to reduce situations where a conflict of interest may arise.

Thus the proposed regulations contain provisions banning, among other things: (i) the manager of the FIDC providing custodial services to the fund or hiring a related party as custodian; (ii) the manager, the specialised consultant, or the custodian (as well as parties related to them) selling credits to the FIDC; (iii) the originator of the credits, the seller of the credits, the specialised consultant or the investment adviser (as well as parties related to them) rendering services related to the verification of the credit rights or taking custody of the documentation related to the credits; (iv) the payments in relation to the credits purchased by the FIDC flowing through accounts held by the sellers of such credits.

The new proposed rules also contain stricter provisions regarding the custody and operational control of the assets of the FIDCs.

The CVM has published the proposed new rules and is waiting for comments from the market. It is expected that the changes will be enacted and become effective during the fourth quarter of 2012.

Antonio Felix de Araujo Cintra

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