Public Offering Distribution Of Brazilian Structured Operations Certificates (COE)

On October 14, 2015, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) issued CVM Instruction No. 569 (ICVM 569/2015), dealing with the distribution of the Structured Operations Certificates (Certificados de Operações Estruturadas - COEs), created by Law No. 12,249, of June 11, 2010, and regulated by the Brazilian Monetary Council (Conselho Monetário Nacional - CMN) Resolution No. 4,263, of September 5, 2013 (CMN Res. 4,263/2013).

1. Introduction

   The COE is similar to the structured note as adopted in other jurisdictions, which is a hybrid security that includes several financial products, typically a stock or bond plus a derivative, and it allows to offer investments with alternative profiles of risk and have a fixed and variable (stock market) income as return.

   For CVM this new product is important to disseminate the culture of long-term investments in Brazil and, taking into account the wide range of underlying assets and allowable indexers, makes it accessible to investors a greater diversification of risks.

2. Features of the COE

   The COE brings advantages over certain operations known as structured borrowings (captações estruturadas), which were the existing alternative to combine the features of fixed and variable income prior to the entry into force of CMN Res. 4.263/2013.

   Part of these structured borrowings was held by combining the transactions with the registration of several derivatives contracts (alone and in dispersed form) so that the individual results of each contract, when combined, represented the payout structure previously agreed between the parties.

   With the possibility to issue the COE, there is a reduction of certain expenses such as transactional costs and those related to records, controls and supervision because the rights and obligations of the parties involved in an operation of this complexity are consolidated in a single certificate.

   Another route that has been used until then for this type of operation involved the structuring of a multi-strategy investment fund (fundo de investimento multimercado), usually with protected capital, submitted to the regime of CVM Instruction No. 409, of August 18, 2004. However, the formation and operation of an investment fund involve various extra charges, which impact the final return of the investor.

   As a result of the consolidation of rights and obligations into a single instrument, it is possible to develop a secondary market of COE, unlike structured borrowings, which are based on combining the results of various bilateral agreements and are conditioned to the interest of repurchase of the instrument by the financial institution and consequently have less liquidity.

   ICVM 569/2015 was elaborated with the goal of ensuring the protection of the investors of that new product, focusing on adequate information disclosure, fair treatment and mitigating regulatory arbitration.

3. International Context

   An extensive review of the international regulation supported the drafting of ICVM 569/2015. In this regard, CVM has assessed regulatory approaches used by the European Union[1], United Kingdom[2], France[3], Portugal[4], Australia[5], United States[6] and Canada[7].

   Additionally CVM also consulted the Final Report "Regulation of Retail Structured Products" of December of 2013 of the International Organization of Securities Commissions - OICV/IOSCO (IOSCO). This work presents...