On December 15 2009, the Brazilian government enacted Provisional Measure 472. Among other things, it created two new financial instruments for the long term funding of financial institutions, the Financial Bill (Letra Financeira) and the Structured Transactions Certificate (Certificado de Operações Estruturadas).
Under Brazilian Banking Law (Law 4.595, of December 31 1964), financial institutions are not allowed to issue debentures or other types of bonds, having very limited sources of funding. As a result, the funding of financial institutions in Brazil has been made mainly through the issue of short-term certificates of deposit. So the Financial Bill will be very important for the Brazilian banking industry, since it offers new alternatives for funding.
One of the features of the Financial Bill is its negotiability. The Financial Bill is a negotiable instrument that can be freely traded and subjected to public offerings in accordance with the Brazilian securities regulation.
|José Eduardo Carneiro Queiroz|
In addition, the Financial Bill can have (i) indexation to foreign currencies, (ii) fixed or floating interest rates, and (iii) collateral or personal guarantees. Moreover, the Financial Bill can have a subordination clause, so that creditors only have priority over the shareholders of the issuer.
From a banking regulatory perspective, the Provisional Measure allows financial institutions to use Financial Bills as hybrid debt instruments, which combine features of debt and equity, so the Bills can be used to meet minimum regulatory capital requirements.
As mentioned above, the Provisional Measure also created the Structured Transactions Certificate, a new financial instrument that may be issued by financial institutions. It can be backed by derivate transactions and used for the securitisation of derivatives.
According to the Provisional Measure, the Brazilian Monetary Council will further regulate way the Financial Bills and Structured Operation Certificates are going to be used by banks and other types of financial institutions.
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