Additional Rules On Brazilian Financial Bills

The Brazilian Monetary Council (Conselho Monetário Nacional - CMN) issued Resolution No. 4330, of May 26, 2004 (CMN Res. 4330/2014), improving the rules on the issuance of Financial Bills (Letras Financeiras - LFs), regulating provisions established by Law No. 12838, of July 9, 2013 (Law 12838/2013) that aligns certain characteristics of the LF to the requirements necessary for its use for purposes of composition of the Regulatory Capital (Patrimônio de Referência - PR) of the issuing financial institutions1.

The LF 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).

These measures are part of the set of actions related to the adoption of the recommendations of Basel III in Brazil that is scoped to improve the ability of the financial institutions' capital, which must be enough to withstand any shocks from the financial system or other sectors of the economy.

CMN Res. 4330/2014 changes CMN Res. 4123, of August 23, 2012, that governs the issuance of LFs, specifically amending the provisions dealing with the use of the instrument for composition of the PR and the repurchase of the instrument by the issuer.

The LF issued with subordination clause, for composition of the PR, must provide for: (i) suspension of payment of the stipulated remuneration; (ii) permanent extinction of right to credit represented by the LF or, alternatively, conversion of this right into eligible shares of the issuer's the Main Capital (Capital Principal); (iii) maturity only conditioned to the occurrence of the dissolution of the issuer or breach of the obligation to pay the stipulated remuneration, in which case both conditions should be included in the LF; and (iv) at the discretion of the financial institution, correction according to the exchange variation.

Considering that some of these features represent significant innovations in the legal framework, the regulation requires that its use be confined to LFs issued to compose the PR.

The regulation provides that the effectiveness of the suspension of payment and termination of right to claim clause [item (i) above] or the conversion of the LF into shares clause [item (ii) above] be subject to...