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...