New Rules On The Brazilian Exchange Traded Funds (EFTs)

On September 16, 2013, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) issued CVM Instruction No. 537 (CVM Instr. 537/2013), amending CVM Instruction No. 359, of January 22, 2002 (CVM Instr. 359/2002), that regulates the incorporation, administration and operation of the Brazilian Market Index Investment Funds (Index Funds), also known in Brazil and abroad as Exchange Traded Funds (ETFs).

The EFT is organized as an open-end joint ownership, whose resources are intended for investment in securities portfolio that seek to replicate the variations and profitability of a benchmark index for an indefinite period of time. For this purpose, benchmark index means a specific market index recognized by CVM, with which the investment policy of the EFT is associated.

The new rules allow managers of ETFs to use investment strategies that reflect the behavior of fixed income indices in the performance of the Fund. The indices accepted for the authorization of this kind of investment vehicle were restricted until this moment to indices based on asset portfolios of variable income.

Furthermore, CVM decided to set forth the criteria to be followed for determining the benchmark index, which will have to be used by the market participants in their applications for authorization for operation of ETFs. The approval of the benchmark index will consider at least the following criteria:

the complete calculation methodology of the index must be made available free of charge and through the Internet, including its composition, the weights of each financial asset, the criteria of rebalancing and its frequency, and other parameters required for its replication. These weights can be published retrospectively after each rebalancing of the index, with the deadline date of the subsequent rebalancing; the calculation methodology of the index must include predetermined rules and objective criteria; the frequency of index rebalancing shall allow investors to replicate it; the index cannot be subject to retroactive adjustments; the chosen index must represent an investment goal clear and single, without conditions. Conditions are any clauses or rules that imply that under certain circumstances the performance of the index does not reflect the return of the theoretical portfolio of assets; index whose provider is a party related to the administrator or the manager is not acceptable; index whose provider receives potential payments...