brazil local market guide

5/20/2018 Brazil Local Market Guide

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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES ANDANALYST CERTIFICATIONS.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION

Client-Driven Solutions, Insights, and Access

Guide to

Brazil Local MarketsEconomics Brazil

This report, in its eighth year, provides international investors with a summary

of Brazils fixed-income market and describes in a nutshell the bonds and

derivatives available, the institutions and market players involved, and the

taxes levied on the different products. It also presents an overview of the

LOCuS system, which Credit Suisse clients can access to obtain financia

market data and real-time quotes.

13 March 2014Economics Research

http://www.credit-suisse.com/researchandanalytics

Research Analysts

Nilson Teixeira+55 11 3701 6288

[email protected]

Paulo Coutinho+55 11 3701 6353

[email protected]

Iana Ferrao+55 11 3701 [email protected]

Leonardo Fonseca+55 11 3701 6348

[email protected]

Daniel Lavarda+55 11 3701 6352

[email protected]

We acknowledge the significant assistance from

Pmela Borges, Felipe Leon and Tlio Sousain the preparation of this report.


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Brazil Local Markets

Table of ContentsSummary 4

1. Introduction 5

2. Financial System 7

3. Exchange Rate 8

4. Interest Rates 12

4.1. Selic Rate ................................................................................. 12

4.2. CDI Rate .................................................................................. 13

4.3. Basic Financial Rate ................................................................. 14

4.4. Reference Rate ........................................................................ 14

4.5. Long-Term Interest Rate .......................................................... 15

5. Inflation Indexes 17

5.1. IBGE Indexes ........................................................................... 17

5.2. FGV Indexes ............................................................................ 18

6. Brazils Public-Sector Debt 20

6.1. Overview .................................................................................. 20

6.2. Domestic Public Securities ....................................................... 21

6.3. Secondary Market .................................................................... 27

7. Private-Sector Securities 29

7.1. CDBs and RDBs ....................................................................... 29

7.2. Corporate Bonds ...................................................................... 31

7.3. Agricultural Cash Forward Contract Bonds (CPRs) .................. 33

7.4. Certificates of Real Estate Receivables (CRIs) ......................... 34

7.5. Banking Credit Notes (CCBs) ................................................... 38

7.6. Receivables-Backed Investment Funds (FIDCs) ...................... 38

7.7. Judicial Requisitions to Treasury for Budget Appropriation

and Payment of Money Judgments (Precatrios) ............................ 40

7.8. Treasury Bills (LFs) .................................................................. 41

8. Derivatives and Swaps 43

8.1 Futures and Options .................................................................. 43

8.2. Swaps ...................................................................................... 55

9. Taxation of Foreign Investments in Brazil 59

9.1. Income Tax .............................................................................. 59

9.2. Tax on Financial Transactions (IOF) ......................................... 61


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Appendix A: Financial System Entities 62

Regulatory and Oversight Entities ................................................... 62

Other Important Entities .................................................................. 64

Appendix B: Requirements for Foreign Investors 67

Appendix C: Form for Foreign Investors Registration with the CVM 68

Appendix D: Brazil Local Markets in LOCuS 71

Introduction ..................................................................................... 71

Brazil in LOCuS ............................................................................... 72

List of Web Sites ............................................................................. 80


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SummaryThis Guide to FI Marketsin Brazilexplains in detail the operations of Brazils fixed-incomefinancial market. It describes the main financial assets and instruments traded locally(bonds and derivatives) as well as the applicable taxes. It also contains importaninformation on the main institutions that regulate and oversee the local financial system

Among the assets and financial instruments presented, we highlight the following:

federal public securities, the main public debt bonds traded on the local marketwhether fixed-rate or linked to a floating interest rate or inflation index; information is alsoprovided on auctions of public debt securities;

private bonds, especially certificates and receipts issued by financial institutions(Certificates of Deposit (CDBs), Non-Transferable Certificates of Deposit (RDBs), andTreasury Bills (LFs)) and by companies in general (bonds);

assets backed by credit receivables, especially Banking Credit Notes (CCBs) andspecific receivables such as Certificates of Real Estate Receivables (CRIs); there is alsoa description of Receivables-Backed Investment Funds (FIDCs), which raise capital fothe acquisition of receivables to be traded on the market in the form of fund shares;

precatrios, which are judicial requisitions to treasuries for budget appropriation andpayment of money judgments against public entities; these instruments are classified asreceivables, and the attached rights can be assigned to a third party by the respectiveholders;

derivatives, the main financial derivatives traded on the securities, futures, andcommodities exchange and on over-the-counter markets; these derivatives includeswaps involving interest rates, exchange rates, and inflation indexes as well as optioncontracts.

For each of these assets, we provide the yield calculations and data on volumessecondary-market liquidity, and timetables of issuances and maturities.

This guide is divided into nine sections and four appendices. The first section presents a

general overview of the participation of foreign investors in the Brazilian fixed-incomemarket. The second presents the main institutions that comprise the Brazilian financiasystem and their roles, described in further detail in Appendix A. The following sectionpresents Brazils foreign exchange market and describes the main currency tradingplatforms and the PTAX exchange rate calculated by the central bank and used as abenchmark for settlement of onshore and offshore contracts indexed to the USD. In thefourth section, we present the main interest rates used in the domestic markets, especiallythe Selic basic interest rate, used to guide monetary policy, and the Certificate of InterbankDeposit (CDI) rates. The fifth section contains an overview of the main inflation indexesused in Brazil. A more extensive discussion of these indexes can be found in the BraziInflation Guide, first published on June 25, 2009. The main features of public and privatefixed-income securities are presented in detail in sections six and seven, respectivelySection eight presents the main derivatives and swaps of interest, currency, and inflation

rates traded on the local market. Taxation matters are addressed in section nine. InAppendices B and C we present the main procedures a foreign investor needs to follow inorder to qualify to trade in the local market. Finally, Appendix D contains a guide to thepages on Brazilian fixed-income markets within the LOCuS system, which can beaccessed by Credit Suisse clients.


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1. IntroductionThe flow of foreign portfolio investments into the main emerging economies has grownsignificantly in recent years (Exhibit 1). Historically, foreign investors financial investmentsin Brazil have been heavily concentrated in equities. Nevertheless, the share of foreigninvestments in fixed-income securities has increased since the mid-2000s (Exhibit 2). Webelieve this movement will continue in the coming years, owing mostly to the continuedwide gap between domestic and international interest rates and the withdrawal in June20131of the 6% Tax on Financial Transactions (IOF) levied on these investments sinceOctober 2010.

Exhibit 1: Net Foreign Portfolio Inflow into DebtInstruments

Exhibit 2: Breakdown of Stock of Foreign PortfolioInvestments in Brazil

USD bn % of total, USD bn

2008

1 28 6 5

10

3

1014

5

13 15

7 9

30

11 11

23

-4

0

1620

32

25

811

37

47

71

50

2009 2010 2011 2012 2013

Chile

Indonesia1

Brazil

Turkey2

Mexico1

450

400

350

300

250

200

150

100

50

0

100

90

80

70

6050

40

30

20

10

0Nov-02 Sep-04 Jul-06 May-08 Mar-10 Jan-12 Nov-13

Equities (%)

Fixed Income (%)

Portfolio Size(USD bn, LHS)

1Cum. 12 months through September. 2Cum. 12 months through November.Source: IMF, Credit Suisse

Source: Central Bank of Brazil, Credit Suisse

The share of domestic federal securities debt (DPMFi) held by foreigners in Brazicontinues to rise, although current levels are somewhat lower than in other emergingmarkets (Exhibit 3). The higher share of foreign investors in government securities has apositive impact on the domestic debt profile. Compared to local investors, foreigners areusually more prone to invest in fixed-income securities with much longer maturities. Hencethe increase in the participation of foreign investors has contributed to an extension in thematurities of government debt.

In addition to their impact on the maturity profile, foreign investors help increase liquidity inthe secondary market, particularly for instruments still sparsely used in Brazil, notablybonds backed by credit receivables.

1For securities traded in Brazil. Securities traded abroad with maturities of less than one year are subject to the IOF at 6%.


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Exhibit 3: Share of Domestic Public Debt of EM Countries Held by Foreign Investors

% of total

Brazil Turkey Mexico

0

2

4

6

8

10

12

14

16

18

Dec-13Jan-08 Jan-10 Jan-12

16.1

Dec-13Jan-07 Jan-09 Jan-11 Jan-128

10

12

14

16

18

20

22

24

26

21.5

5

10

15

20

25

30

35

40

Dec-13Jan-07 Jan-09 Jan-11 Jan-12

36.9

Source: Treasuries, Credit Suisse

In the past few years, the Brazilian government has announced a set of measures toencourage long-term financing. The measures were structured in two main parts: taxincentives for long-term corporate bonds earmarked for investment projects and the

creation of a fund to stimulate the liquidity of those bonds in the secondary market(although this fund has not yet become operational). Through those measureshouseholds and foreign investors purchasing local corporate bonds that meet certaincriteria became exempt from income taxes and the IOF tax2.

2 In October 2010, the government increased the IOF levied on foreign investments in fixed-incomesecurities traded in Brazil, including infrastructure bonds, to 6%. The government reduced to 0% first theIOF on infrastructure bonds (in December 2011) and, later, the IOF on all private securities traded in thecountry (in June 2013).


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2. Financial SystemThe basic features of Brazils financial system were established through a series oinstitutional reforms that started in 1964/65 with the creation of the National MonetaryCouncil (CMN) and the Central Bank of Brazil and ended in 1976 with the creation of theBrazilian Securities Commission (CVM).

Additional measures to restructure the financial system involved regulations to separateproprietary trading from asset management (information barriers), the introduction ocompliance departments within financial institutions, the creation of a credit risk centernew directives to control market risks and interest rate risk (already applicable to foreign-currency transactions), and the reform of securities market legislationwhich increasedthe participation of minority shareholders in company decisions and introduced corporategovernance practices.

Exhibit 4 illustrates the institutions operating in the Brazilian financial system and agenciesin charge of oversight and regulation. The role of the major regulatory and oversightagencies is explained in detail in Appendix A.

Exhibit 4: Regulatory and Oversight Agencies

Other settlement and custody systems

Foreign exchange brokers

Central Bank Securities Commission (CVM)Operating Institutions

Financial InstitutionsFinancial Institutions

Full-service banks

Commercial banks

Savings and loan associations

Credit unions

Development banks

Investment banks

Leasing companies

Settlement and Custody Systems

Selic

Cetip

Consortium managers

Asset Management

Credit, finance, and investment companies

Mutual funds

Investment clubs

Foreign investors' portfolios

InMaturityediaries

Commodities and futures exchange

Stock exchanges

Autonomous investment agents

Brokerage firms / securities dealers

Source: Brazilian Securities Commission (CVM), Credit Suisse


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3. Exchange RateThe Brazilian exchange rate system is a dirty float system. The central bank actively buysand sells dollars both in the spot and derivative markets. According to the monetaryauthority, the interventions in the FX market aim to cover a lack of liquidity and ensure thathe market functions properly. To make the system more transparent, the central bankintervenes in the market through primary dealers3, disclosing information to the market onweekly basis, generally on Wednesdays4.

In 2005, the National Monetary Council (CMN, Appendix A) concluded the process ounifying Brazils FX markets. Under the new regime, the differences in legislation and thecommercial5and tourism6 rates were eliminated. Virtually all exchange rate transactionsmust be registered with the central bank; however, unification of the FX markets significantlysimplified transactions involving foreign currencies and reduced red tape, especially fooffshore remittances.

Under the previous system, each type of transaction required a different set of documentsWith the unification of the markets, the documents necessary for FX transactions ceased to beclassified by type. Moreover, the financial institution carrying out the transaction is responsiblefor submission of all necessary documentation, except in certain situations.

Spot Market

The spot FX market has a daily average turnover of around USD 3bn. Spot trades can bemade on the So Paulo Securities, Commodities, and Futures Exchange (BM&FBovespa

Appendix A), on the over-the-counter (OTC) market, or at foreign exchangeclearinghouses. All trades must be registered in the Central Bank Information System(SISBACEN, Appendix A).

The spot dollar market of the BM&FBovespa was created in February 2006. It is a tradingsystem that allows parties interested in buying and selling dollars to make bids through abroker or a bank, which are responsible for sending accepted orders to traders at theBM&FBovespa for execution. Although this market provides more transparency and safetyin trading, it has very low liquidity, in part due to the costs involved in settlement services

Before the emergence of the BM&FBovespa spot dollar system, transactions in the spotdollar market were carried out only in the interbank FX market, between brokerage firmsand banks authorized to operate by the central bank.

3The central bank currently intervenes in the FX market via 14 previously selected financial institutions(primary dealers). The dealers are chosen every six months, and at least two institutions must swapfunctions in each period. The number of dealers may also change between periods. The central bankuses the following five criteria for selecting dealers:1. information provided to the central bank (weight of 30%), used by the central bank to determine how

each institution operates in the FX market;2. imports and exports (25%), volume of FX transactions linked to imports and exports traded by th

institution;3. financial FX (20%), the volume of financial FX transactions carried out by the institution;4. USD-linked securities and reverse FX swaps (20%), volume of public debt bonds adjusted fo

currency gains/losses and currency coupon swaps traded by the institution; and5. interbank market (5%), volume traded by the institution in the FX interbank market.

4The Treasury also buys dollars in the market to cover external debt obligations. The Treasurys purchaseoperations are made using Banco do Brasil.

5This segment was used for: (i) exports/imports; (ii) federal, state, and municipal governments; (iii) foreigninvestments in Brazil and loans to residents; and (iv) payments for services.

6 The floating FX rate segment was for tourism transactions, contributions to associations, donationsinheritances, retirement and pension benefits, maintenance of residents and health treatment.


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PTAX Rate

The PTAX is the official exchange rate used for settlement of financial contracts indexed tothe dollar. It is used as a benchmark for USD-linked onshore and offshore contracts (forinstance dollar future contracts and dollar-linked rates, such as non-deliverable forward(NDF) contracts settled in USD, and bonds).

The central bank is responsible for calculating and publishing the PTAX rate. The PTAX isthe arithmetic average of the rates obtained in four daily consultations of exchange dealersConsultations are carried out at around 10:00 a.m., 11:00 a.m., 12:00 noon, and 1:00 p.m(local time). The exchange rate for each consultation corresponds to the average of rateseffectively quoted by the dealers, excluding in each case the two highest and two lowest7

The results are released after each survey, and the PTAX rate is released around 1:00p.m. (local time).

Government Intervention

As a response to the post-crisis BRL appreciation, the government implementedmeasures aiming to reduce excessive volatility of the local currency. However, themajority of these measures have been reverted since June 2012, following thesignificant depreciation of the BRL in 2Q12 (from BRLUSD 1.80 in March to 2.05 inJune) and in 2013 (BRLUSD 2.45 in August). The main interventions in the FX markeduring this period were (Exhibit 5):

Taxation of foreign investment in fixed income: The Tax on Financial Transactions(IOF, described in more detail in Chapter 9) was charged on investments by nonresidents in fixed-income securities traded in Brazil. The rate, which increased from 0%to 2% in October 2009 and from 2% to 6% in October 2010, applied to the purchase ofBRL by foreign investors. The regulation also required a simultaneous FX transaction if

the investor decided to migrate from an equity, futures, or commodities investment to afixed-income asset. In this case, the investor would have to pay the IOF tax as well. TheIOF was reduced to 0% in June 2013.

Taxation of foreign investment in equities: The IOF of 2% was imposed on non

residents investments in equities, including American Depositary Receipts (ADRs), inOctober 2009. In November 2009, the levy on investments in ADRs was reduced to1.5%. The IOF rate on investments in equities traded in Brazil was reduced from 2% to0% in December 2011 and on ADRs, from 1.5% to 0.0% in December 2013.

Establishment of mandatory reserves for banks short FX positions:In January 2011the reserve requirement was implemented on 60% of the short positions in dollars thatexceed the lower of USD 3.0 billion and the institution's Tier-1 capital. The reserves aredeposited at the central bank in local currency and are not remunerated. The upper limitwas lowered to USD 1.0 billion in July 2011. In June 2013, the government cancelled thereserve requirements for banks short positions in dollars entirely.

Taxation of foreign loans:In March 2011 the Tax on Financial Transactions (IOF) wascharged on external loans with maturities of less than one year. The levy was extended

to loans with maturities of less than two years in April 2011, three years in March 2012,and finally to five years later in March 2012. The IOF was maintained only for loans withmaturities of less than two years in June 2012. The threshold was later reduced to oneyear in December of the same year.

7This methodology went into effect in July 2011. The PTAX rate according to the former methodology wasthe average (volume-weighted) FX rate of transactions in the spot FX market with settlement two daysafter the transaction (T+2). This calculation was made after purging transactions whose volume exceeded5% of the volume traded in the day. The rate was announced after the market close (5:30 p.m., locatime) and was based on only one daily survey.


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Brazil Local Markets 1

Taxation of short positions in financial derivatives: In July 2011, the IOF wasimposed at the rate of 1%on increases in short positions in financial derivatives whosesettlement value is influenced by movements in the FX rate (e.g., USD options, futuresand forward-rate agreements (FRAs). The 1% IOF was also levied on domesticinvestors to prevent increases in short dollar positions. Specifically, a new acquisition orsale of an exchange derivative resulting in an increase in short position or decrease inlong position greater than USD 10 million in one day was subjected to the 1% IOF on the

notional value of the transaction. The government withdrew this measure in June 2013.

In sum, the governments intervention measures aimed at controlling FX rates, still in placeas of February 2014, are:

IOF levy of 6.0% on external loans with maturities of less than one year; and

IOF levy of 6.38% on credit card transactions abroad, on payments in foreign currencymade with debit cards, on foreign currency withdrawals abroad, on purchases oftravelers checks, and on the addition of foreign currency to prepaid cards.


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Exhibit 5: Interventions in FX Market

OCTOBER

19: Increase in Tax on Financial Transactions (IOF) rate on foreign inflows for equities and fixed-incomeinvestments from 0% to 2%.

OCTOBER04: Increase of IOF on investments in fixed income, from 2% to 4%. Investments in equities remain subject to the IOF of 2%.

07: Simultaneous FX transactions for foreigners that transfer their investments from the securities, futures, and commodities exchange toother investments in the financial and capital markets, such as fixed-income securities.

18: New increase in IOF tax rate on inflows for the purchase of fixed-income securities, from 4% to 6%.

JANUARY

06: Imposition of reserve requirements on banks' short dollar positions.

Reserve requirement applies to 60% of short positions in dollars exceeding lesser of USD 3.0 billion and the institution's Tier -1capital. Reserves are deposited with central bank in local currency and will not be remunerated.

10: Brazils Sovereign Fund permitted by its bylaws to deal in the FX market.

13: Resumption of central banks reverse swap auctions, taking long FX positions in derivatives markets.

25: Resumption of Maturity auction facilities by central bank in FX market.

MARCH

28: IOF rate on credit card t ransactions abroad raised from 2.38% to 6.38%.

29: IOF levy of 6% on foreign financing with maturity of less than one year.

APRIL

06: IOF levy of 6% on foreign loans is extended to transactions with maturity of up to 2 years.

JULY

08: Reduction in limit for reserve requirements on banks' short position in dollars.

Minimum deposit charged on 60% of short dollar positions that exceed lesser of USD 1.0 billion and bank's regulatory capital. Depositmust be made in cash and will not be remunerated.

27: IOF levy of 1% imposed on increases in short positions in financial derivatives whose settlement value is affected by FX rate changes.The levy will apply only to net short positions above USD 10.0 million.

27: Legal framework established for IOF levy on derivatives market. Government permitted to raise IOF rate to up to 25% of value oftransactions in derivatives market.

DECEMBER

01: IOF rate on investments in stocks and bonds of infrastructure companies reduced to 0%.

MARCH01: IOF levy of 6% on foreign loans extended to transactions with maturities of up to 3 years.

02: Maximum period of advance payments by exporters limited to 360 days; transactions must be financed by importer of goods.

12: IOF levy of 6% on foreign financing extended to transactions maturing within 5 years.

JUNE

14: Maturity of loans subject to IOF levy reduced from 5 to 2 years.

28: Rules on advance payment transactions extended to financial institutions and other companies.

DECEMBER

04: Maximum period for advance payment of export transactions extended from 1 to 5 years.

05: Maturity of loans subject to IOF levy reduced from 2 years to 1 year.

JANUARY

30: IOF levy on foreign investment in shares of real estate investment funds reduced from 6% to 0%.

JUNE

04: IOF levy on foreign investments in fixed income reduced from 6% to 0%.

12: IOF levy on increases in short positions in financial derivatives whose settlement value is affected by FX rate changes reduced from1% to 0%.

25: Cancellation of reserve requirements on banks short position in dollars.

JULY

03: Elimination of maximum Maturity (5 years) for prepayment of export transactions.

24: IOF levy on foreign investment in ADRs reduced from 1.5% to 0%.DECEMBER

27: IOF levy on payments in foreign currency made with debit cards, on foreign currency withdrawals abroad, on purchases of travelerschecks, and on the addition of foreign currency to prepaid cards increased from 0.38% to 6.38%.

NOVEMBER

18: Reduction in IOF rate on foreign investment in ADRs from 2% to 1.5%.

Source: Central Bank of Brazil, Ministry of Finance, Credit Suisse.


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4. Interest RatesInterest rates in Brazil (for example, the Selic basic interest rate and the Certificate ofInterbank Deposit (CDI) rate) are expressed mainly in compound annualized terms, basedon a year of 252 business days. They differ from the US standard compounding methodwhich uses a 360-day year (Exhibit 6).

Exhibit 6: Counting of Days for Interest Rates in Brazil

Calendar Days 360 / Linear

ie effective rate in the period ie effective rate in the period

ia effective annual rate ia effective annual rate

d

days between date 1 and date 2(1) Does not accrue on weekends or holidays

ia360

die= ie= (1 ia)

business days

252 1

Business Days (1) / 252 Exponential

Source: Credit Suisse

4.1. Selic RateThe Special Settlement and Custody System (Selic) is an electronic system run by thecentral bank for registration, settlement, and custody of transactions involving publicsecurities. All Selic transactions are settled immediately; debits and credits are madedirectly to each institutions reserves account at the central bank.

The Selic rate is the average of rates for one-day financing transactions backed byfederal public bonds, carried out in the Selic system in the form of repurchase (repo)operations8. The interest rates for the transactions used to calculate the Selic ratereflect the liquidity conditions in the bank reserves market. These interest rates are notinfluenced by counterparty risk in the buyback transactions since all trades are backedby federal public securities.

The Selic rate is also the basic interest rate used as a benchmark for monetary policy. The

Selic rate is set by the Monetary Policy Committee (Copom) at its eight regular meetingsheld each year. The Copom defines not only the target for the Selic rate but also theCommittees bias. If a negative or positive bias is adopted, the central bank governor canalter the Selic rate target at any time between Copom meetings, provided this changefollows the direction of the announced bias. Using a bias has become unnecessary inrecent years, however, as inflation and volatility have both decreased significantly. Thebias has been neutral since March 2003.

The establishment of the target induces banks operating in the Selic system to carry outone-day buyback transactions around the target, since the daily activity of the central banktends to offset surpluses or shortfalls in bank reserves, bringing the target close to the rateeffectively negotiated.

8Sales of bonds with a buyback commitment assumed by the seller and a resale commitment assumed bythe buyer.


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4.2. CDI RateThe CDI rate is the average rate of one-day transactions backed by fixed-rate Certificatesof Interbank Deposit (CDIs), registered and settled by the Cetip clearinghouse (Appendix

A). Its calculation takes into account only one-day trades between institutions of differenfinancial groups.

The majority of CDI trades are made for a period of one day (overnight) and are referred toas DI Over. A repo based on the CDI rate takes place when two institutions agree on an

interest rate and close the deal electronically (Exhibit 7). The Cetip transfers ownership ofthe CDI to the purchasing institution and creates a credit that impacts the sellinginstitutions reserve account at the central bank on the same day (T). On the next day(T+1), the transaction is reversed, and the purchaser receives its reserve funds, plus thepreviously agreed interest rate (DI Over rate). In October 2013 a new methodology was

adopted to calculate the DI Over rate. Under the new methodology all CDI transactionsrecorded and cleared by the Cetip are used to obtain the DI rate weighted by volume.

According to the former methodology the 5% upper and lower tails were excluded from thecomputation.

Exhibit 7: CDI Settlement

CDI

T+1 End of T+1

Interest$ +Buyer

Seller

$ CDI

$

T End of T

$ + Interest

CDI

CDI


Even though the central bank does not operate directly in this market, the CDI rate tendsto be very similar to the Selic rate (Exhibit 8).

Exhibit 8: Effective Selic Rate and DI Rate

Basis points, p.a.

0.065

0.085

0.105

0.125

0.145

0.165

0.185

Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

0.205

Effective Selic Rate

DI Rate



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4.3. Basic Financial RateThe basic financial rate (TBF) was created to be used as a benchmark rate fortransactions within the financial system with maturities above 60 days. The TBF rate is theaverage of rates paid on Certificates of Deposit (CDBs) and/or Non-TransferableCertificates of Deposit (RDBs)9with maturities of 30 to 35 days. These transactions areweighted by their respective volumes and involve only trades of the 30 largest institutions

on a given day, by volume of their issues of CDBs and RDBs. In the calculation of theweighted average, the two highest and the two lowest rates surveyed and the securitiespurchased by institutions from the same conglomerate are removed from the sample. TheTBF rate is used mainly as the basis for calculating the Reference Rate (TR).

4.4. Reference RateThe Reference Rate of Interest (TR) was created in 1991 as a reference rate for futureinflation built into nominal market interest rates. The idea behind the TR is to strip out theexpected real interest rate from the nominal interest rate represented by the TBF. Thedifference between these two rates points to the expected inflation for the period.

The TR rate is published daily by the central bank and is valid until the same day of the

following month. The calculation of the TR is based mainly on the TBF (average of CDBand RDB rates), to which a reduction factor is applied. The TR reduction factor is afunction of the TBF, and the parameters of its formula are periodically updated by thecentral bank (Exhibit 9).

Exhibit 9: Formulas for Calculation of TR

TR = 1R

1 TBF

Where:

R= TR reduction factor

TBF= Basic Financial Rate on thereference day

B= function of the TBFrate

TBF(% p.a.) B*

TBF> 16 0.48

15 < TBF 16 0.44

14 < TBF 15

0.4013 < TBF 14 0.36

10.5 TBF< 13 0.32

10 TBF 10.5 0.31

9.5 TBF< 10 0.26

9 TBF< 9.5 0.23

R = 1.005 B TBF

* The rule for deMaturityining the B factor is defined byCentral Bank Resolutions 3446 and 3356/07.


The TR rate is mainly used as the basic rate for the Brazilian savings and loan systemwhich finances housing construction. Yields on savings deposits are split into twocomponents:

I. basic remuneration, at the Reference Rate (TR), and

II. additional remuneration, corresponding to:

0.5% p.m., when the Selic basic interest rate is higher than 8.5% p.a.;

70% of the annual Selic rate, when the Selic is less than or equal to 8.5% p.a.

9Please refer to section 7.1.


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Until May 2012, the additional remuneration was 0.5% p.m., regardless of the Selic rateThe change to the taxation rules governing returns on savings deposit accounts occurredto prevent funds from migrating from government bonds and other securities indexed tothe Selic rate to savings deposits (the Monetary Policy Committee (Copom) set the Selicrate below 8.50% in June 2012).

The continued reduction in the Selic basic interest rate in recent years has helped raise

the competitiveness of savings deposits versus other financial investments, mainlybecause the investments are exempt from income tax, which varies between 15.0% and22.5% for most types of investment (Exhibit 10).

Exhibit 10: Passbook Savings and DI Over Rates

% p.a.

CDI rate

Savings yield5

10

15

20

25

30

Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13


4.5. Long-Term Interest RateThe Long-Term Interest Rate (TJLP) was created in November 1994 to stimulate long-term investments, which were previously less feasible due to the absence of a market forlong-term credit in the country. At present, the TJLP is the main rate for credit lines fromthe Brazilian Development Bank10(BNDES) and from the Workers Support Fund (FAT)The TJLP can theoretically be used in any transaction in the financial markets, but thatrarely occurs.

The Long-Term Interest Rate is effective for a calendar quarter and is calculated based onthe following parameters:

(i) the inflation target, prorated for 12 months as of the first month in which the rate iseffective, based on the annual targets set by the Brazilian Monetary Counci(CMN); and

(ii) the risk premium, which embeds an international real interest rate and a componentreflecting Brazils country risk in a medium- and long-term perspective.

The rate is set by the CMN and published by the last day of the quarter immediatelypreceding the date on which it is to take effect (Exhibit 11).

10As of December 2012, the total volume of BNDES loans was equivalent to 10.7% of GDP and the totavolume of all bank loans in the country was equivalent to 53.5% of GDP.


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13 March 2014


Exhibit 11: Long-Term Interest Rate (TJLP) and Target for Selic Rate

% p.a.

TJLP

Selic

5

10

15

20

25

30

Dec-01 Dec-03 Dec-13Dec-05 Dec-07 Dec-09 Dec-11



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13 March 2014


5. Inflation IndexesThere are several price indexes in Brazil, mainly due to the countrys history of high

inflation. We discuss all of these indexes at length in our Inflation Guide: Inflation indexesin Brazil, published on June 25, 2009.

The Broad Consumer Price Index (IPCA) is the index most closely followed by market

agents, due to its status as the standard price index of the inflation-targeting regimeAnother factor that heightened the importance of the IPCA versus other indexes was thegrowth in government bonds linked to the IPCA (NTN-Bs), compared to growth in themarket for government bonds linked to other inflation indexes, such as IGP-M (NTN-Cs).

Despite the greater importance of the IPCA, market agents also follow the other priceindexes, in particular the General Price Indexes (IGPs) and the CPI put out by the Instituteof Economic Research Foundation (Fipe). These indexes differ in their underlying basketsof goods and services, household target as a function of income brackets, andgeographical locations. In the case of the IGPs, producer inflation has higher weight in theindex than consumer inflation.

5.1. IBGE IndexesThe Brazilian Statistics Bureau (IBGE) publishes three important inflation indexes eachmonth: IPCA, IPCA-15, and INPC. The indexes follow the same method of calculation budiffer in terms of the data collection period and the composition of the basket of productsand services.

IPCA

The IPCA reflects prices on a nationwide basis (data collected in nine major metropolitanareas, plus the cities of Goinia and Braslia), for goods and services used by householdswith monthly income between 1 and 40 times the monthly minimum wage11. The change inthe index is calculated on the basis of the weighted arithmetic average of the price groupsand the weighting is variable according to past inflation.

The most frequently analyzed breakdown of the IPCA is between market prices andadministered prices. Around 25% of the IPCA is composed of goods and services whoseprices are administered directly or indirectly by the government; the remainder isrepresented by market prices. Recent inflation analyses have also made the distinctionbetween food and other items in the inflation index more relevant.

IPCA-15

The IPCA-15 index is calculated using the same methodology of the IPCA. The differenceis the period of the price surveys (sampling period). The IPCA-15 uses the prices collected

from the 16th day of the previous month to the 15th day of the current month, while theIPCA is collected from the first through the last day of the month (Exhibit 12). Given thathe IPCA-15 is released before the IPCA, it has become a good method for determiningthe trend of the IPCA.

11From USD 339 to USD 13,560 as of February 2013.


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13 March 2014


Exhibit 12: Period of Data Collection and Publication of IPCA-15 and IPCA

IPCA (Broad Consumer Price Index)

From the 1st tothe 30th day ofthe referencemonth

of the following month

IPCA-15 (Broad Consumer Price Index, mid-month)

From the 16th day of themonth before the referencemonth to the 15th day of thereference month

of the reference month

Surveyperiod

Approximatemonthlyrelease date

Index

Source: Brazilian Statistics Bureau (IBGE), Credit Suisse

5.2. FGV IndexesThe General Price Indexes (IGPs) are published by the Getlio Vargas Foundation (FGV)They combine prices surveyed in various production chains, ranging from basicagricultural prices to inputs in the construction sector. The IGPs are made up of three sub

indexes: the Producer Price Index (PPI), the Consumer Price Index (CPI) and the NationaConstruction Cost Index (INCC, Exhibit 13).

Exhibit 13: Composition of General Price Indexes

% of total

INCCRepresents the value

added by the constructionindustry to GDE

Represents the valueadded by the retail sectorand consumer services

to gross domesticexpenditure (GDE)

CPI

60%

30%

10%

PPI

Represents the valueadded by production,transportation, andwholesale trade to

GDE

Source: Getlio Vargas Foundation (FGV), Credit Suisse

The FGV releases three general price indexes during the month: IGP-10, IGP-M, and IGPDI, which use the same calculation methodology and differ only in their collection period(Exhibit 14).


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Exhibit 14: Survey Periods and Publication of IGPs

IGP-10

From the 11th day of themonth before the referencemonth to the 10th day of the

reference month


IGP-M

From the 21st day of themonth before the referencemonth to the 20th day of

the reference month


Survey

period

Approximatemonthlyrelease date

Index IGP-DI

From the 1st to the 30th

day of the referencemonth

of the following month


The IGP-M is one of the most widely used indexes, mainly since it is published before theend of the reference month, while the results of most indexes are not reported until the

following month. The IGP-M is the only IGP index that collects partial data every ten dayscalled previews. The announcement of the partial results for the 10- and 20-day periodsenables analysts to anticipate changes in the overall IGP-M index. The IGP-M previewsmeasure the change in prices in 10- and 20-day periods over a fixed comparison base(Exhibit 15).

Exhibit 15: Calculation of IGP-M and IGP-M Previews

21 20 2021 30 10

Month 3 IGP-M = Average A / Average B

Average B Average A

1st

IGP-M proxy in month 3 = Average C / Average B

2nd IGP-M proxy in month 3 = Average D / Average B

Month 1 Month 2 Month 3

30 1 1

Average C

Average D



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6. Brazils Public-Sector Debt

6.1. OverviewThe improvement in solvency indicators and the active role of the Brazilian Treasury havecontributed to a significant change in the debt profile and to an increase in the average

time to maturity of domestic federal public securities debt (DPMFi), namely:

increase in the shares of fixed-rate securities and inflation-linked securities in totadebt;

reduction in the shares of Selic-floaters and USD-linked securities12(Exhibit 16).

Exhibit 16: Breakdown of Domestic Federal Debt Securities (DPMFi)

% of total

Fixed-rate

Inflation

Selic

FX

14.87.8 2.2

12.520.1

27.936.1 37.3 32.2 33.7

37.9 38.3 41.243.3

5.9

7.012.5

13.5

14.9

15.5

22.526.3

29.3 28.628.1 29.6

35.536.1

57.056.6

62.9

63.2

59.953.9

40.035.5 37.4 37.0 33.4

31.522.8 20.022.3 28.6

22.410.8 5.2

2.7 1.3 0.9 1.1 0.7 0.6 0.6 0.6 0.6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Brazilian Treasury, Credit Suisse

In theory, the new profile would make the public debt less risky by reducing the share thais directly exposed to exchange rate fluctuations and monetary policy cycles. In addition tothe change in debt profile, the average time to maturity also rose (Exhibit 17) 13

Accordingly, the country has also experienced a reduction in the portion of debt maturingin the next 12 months and an increase mainly in the stock of debt maturing within threeyears (Exhibit 18). From 2011 to 2013, however, the stock of debt maturing within oneyear increased slightly, while the stock of debt maturing in one to three years declinedThis movement is explained by the Treasurys more aggressive policy of swapping S eliclinked securities for fixed-rate securities, which typically have shorter maturities.

12The exposure of the DPMFi to the dollar is different from the debt profile due to dollar swap contractswhereby the central bank receives an amount equivalent to the FX gain/loss (plus a fixed interest rate)and pays the CDI interest rate.

13The Treasury calculates the average maturity of securities as the weighted average of the tenors of thevarious flows (intermediate coupons and principal), with the weightings corresponding to the presenvalue of each payment. The average life is calculated as the average of the remaining tenor of thesecurities, weighted only by the present value of the principal. In other words, the calculation of theaverage life is less conservative than the calculation of the average maturity.


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13 March 2014


Exhibit 17: Average Time to Maturity and Durationof DPMFi Exhibit 18: Profile of DPMFi Maturities

Months BRL trillion and % of total

0

15

30

45

60

Oct-97 Oct-01 Oct-05 Oct-09 Oct-13

Average time to maturity

Average duration

Up to1 year

1 to 3years

More

than 3years

0.5 0.6 0.8 1.1 1.3 1.6 1.90.4 0.6 0.7 1.0 1.2 1.4 1.8 2.0

44

32

24

41

29

30

46

37

17

36

41

24

27

36

37

25

40

35

25

36

39

55

26

19

1999

28

36

37

2001

35

44

20

2003

42

41

17

2005

30

41

29

2007

25

37

39

2009

22

41

37

2011

26

33

42

2013

Source: Central Bank of Brazil, Brazilian Treasury, Credit Suisse Source: Brazilian Treasury, Credit Suisse

Brazils external securities debt as a percentage of total securities debt has dropped

significantly since 2006, in part owing to the external debt bond buy-back program(initiated in January 2006, Exhibit 19). The Brazilian Treasury no longer uses external debbond issuances as a source of funding, but rather for operational purposes. According tothe Treasury, the main aim of the new external debt issuances is to build a sovereign yieldcurve in the international market in both USD and BRL, to serve as a benchmark foprivate-sector issuances.

Exhibit 19: Breakdown of Public Securities Debt

% of GDP

6.1 4.1 4.4 3.1 2.4 2.0 2.1 2.0

46.146.0

41.7 43.2 42.5 43.0 43.6 42.2

2006 2007 2008 2009 2010 2011 2012 2013

DPFMi

DPFe

52.250.1

46.1 46.3 44.9 45.0 45.7 44.2


6.2. Domestic Public SecuritiesSince 2002, the Brazilian Treasury has been the only entity responsible for issuances ofpublic debt, both domestic and external. In the past, the central bank was responsible fothe issuance of external debt and shared the responsibility for domestic debt issuanceswith the Treasury. Since then, the central bank has been responsible only for repooperations, by managing a stock of securities originally issued by the Treasury. Currentlythe Treasury issues fixed-rate bonds with maturities of up to 20 years and inflation-linkedsecurities for up to 40 years (Exhibit 20). In the external market, the Treasury has alreadyissued fixed-rate securities in BRL maturing within 35 years (maturity in 2045).


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13 March 2014


Exhibit 20: Features of Domestic Public Debt Securities

LFT NTN-B LTN NTN-C**Security NTN-F

no coupon per semester no coupon per semester Coupon per semester

- 6 - 6Interest (%, p.a.) 10

26.6 95 18.6 84Average time to maturity* (months) 40.6

440.5 605.8 547.7 66.0Outstanding* (BRL bn) 200

5.1 4.2 15.6 -Daily average volume** (BRL mn) 2.5

Selic IPCA Fixed-rate IGP-MIndex Fixed-rate

Still issued?

*As of August 2013. ** NTN-C 010131: interest of 12% p.a.. **In 2013, YTD through August

Source: Central Bank of Brazil, Brazilian Treasury, Credit Suisse

Almost all of Treasurys primary issuances are made via public auctions. At the end o

each month, the Treasury publishes a timetable with the dates of the auctions for thefollowing month as well as the total maturities and the maximum volume of securities thatwill be offered. Banks, brokerage firms, and other institutions registered in the Selic

system can take part in the auctions, which are executed in the Central Bank InformationSystem (SISBACEN, Appendix A). Settlement is on the day after the effective date of theoperation (T+1).

The terms of the auctions depend on the type of securities offered. IPCA-Linked NationaTreasury Bills (NTN-Bs) and Selic Floater Treasury Bills (LFTs) are sold through auniform-price auction, with a single sale price (or cutoff price). The other securities aresold in multiple-price auctions14 (also known as discriminatory auctions), with paymenbased on the offered bid. Settlement takes place on the following business day and can bemade in cash or in other securities, according to the features of the securities being tradedThe Treasury follows a relatively stable timetable of primary issuances, with regulaauctions on Tuesdays, Wednesdays, and Thursdays, depending on the type of securityoffered15(Exhibit 21). These regular auctions always take place from 12:00 noon to 1:00

p.m. (local time).

Exhibit 21: Features of Auctions of Public Securities*

as of December 2013

Settlement Cash Securities

Security

Frequency

Auction type

Weekday Tuesday

(1st step, sale)Wednesday

(2nd step, exchange)

Cash

NTN-F

2 weeks

Discriminatory(multiple-price)

Thursday

NTN-B

2 weeks

Uniform(single-price)

2 steps?

Cash

LTN

1 week

Discriminatory(multiple-price)

Thursday

Cash/Securities

LFT

4 weeks

Uniform

Thursday

* As of December 2013


14In the discriminatory auction, each buyer offers his bid, which may or may not be accepted by theTreasury. Thus, in this case, the sale prices may be different among the various buyers.

15In accordance with the 2013 Annual Financing Plan (PAF 2013), the Treasury will concentrate issuancesmainly in fixed-rate securities (LTNs and NTN-Fs) and IPCA inflation-linked securities (NTN-Bs).


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13 March 2014


In addition to the auctions described above, the Treasury also holds other kinds of auctionsaiming to spread out maturities, lengthen tenors, change compositions, and stimulatesecondary market liquidity. In exchange auctions, for example, the Treasury receives onlyother public securities as payment for the issuance, and in buyback auctions the Treasuryrepurchases previously issued securities. These auctions take place at a lower frequency(Exhibit 22) than the regular ones and have lower liquidity, sometimes ending with no deal.

Exhibit 22: Frequency of Exchange and Buyback Auctions*

Security Exchange Early redemption

Quarterly -

Variable Monthly

Quarterly -

Monthly Monthly

LTN

NTN-F

LFT

NTN-B

* As of December 2013


On the following pages, we present a description of the main public securities issued andtraded in the local market.

LTN (Fixed-Rate, Zero-Coupon)

Issuer: Brazilian Treasury Adjustment of nominal value: Not adjusted

Index: Fixed-rate Redemption of principal:At maturity

Nominal value on reference date: BRL 1,000.00 Number of days in year: 252 business days

Interest rate: 0% (sold at discount) Time to maturity: Liquidity date (inclusive) until maturity date (exclusive)

Interest: No payment of interest Negotiation: Yield-to-maturity (YTM)

Yield from Unit Price YTM: Yield-to-maturity (252 business days)

NV: Nominal value (BRL 1,000.00)

UP: Unit price (market price for 1 security)

bd: Business days between settlement date (inclusive) and maturity date (exclusive).

Unit Price from Yield

-1

252

bd

UPNV

YTM =

Pricing

UP =( )2521+ YTM

bd

NV

Liquidity / Daily Average (BRL mn)

Up to 1 year

1 to 2 years

2 to 3 years

0.1

1.1

6.6

4.8

2.9

2.3 1.7 1.4 1.2 1.0 1.6

3.00.1

1.3

1.31.1

0.8 1.61.1

0.8

1.0

1.8

0.1

0.30.4

0.1 1.1

0.6

0.6

1.2

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Average Time to Maturity (Months) Monthly Average of Issuances (BRL bn)

2007 2008 2009 2010 2011 2012 2013

11.6

6.3

11.3

14.8

18.2 17.816.2

5

10

15

20

Dec-07 Dec-09 Dec-11 Dec-13

7.0

19.6

15.2



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13 March 2014


LFT (Selic-Floater Bond)

Issuer: Brazilian Treasury Adjustment of nominal value:Adjusted by the Selic factor

Index: Linked to Selic basic interest rate Redemption of principal:At maturity

Nominal value on Reference date: BRL 1,000.00 Number of days in year: 252 business days

Interest rate: 0% (sold at discount) Time to maturity: Liquidity date (inclusive) until maturity date (exclusive)

Interest: No payment of interest Negotiation: Yield-to-maturity (YTM)

YTM: Yield-to-maturity (annualized for 252 business days)

SELIC: Cumulative daily Selic rate factor fromReference date (inclusive) to settlement date (exclusive)

UNV:Adjusted nominal value (by the Selic rate factor) NV: Nominal value on reference date (BRL 1,000.00)

UP: Unit price (market price for 1 bond)

bd: Business days between settlement date (inclusive) and maturity date (exclusive).

Quote: Price as a percentage of Adjusted Nominal Value

Pricing

UP UNV( )2521

bd

YTM+= 1-=

252

bd

YTMUPUNV

UNVUPQuote =

SELICNVUNV = SELIC is the BZSELCA

Index on Bloomberg

Liquidity / Daily Average (BRL mn) Issuances, Monthly Average (BRL bn)

6.8 7.1 6.87.4

4.4

1.0

7.2

2007 2008 2009 2010 2011 2012 20132003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Nov-13

Up to 1 year 1 to 2 years more than 2 years

840443 450 370 158 195 174 217 155 186

1243

1034

388 348

551

666

294 402130

171264

380 529 518 367

1403

Maturity/Outstanding Volume (BRL bn) Average Time to Maturity (Months)

*As of December 2013

112.2 113.0

11.8

34.3

84.0

2014 2015 2016 2017 2018 20

25

30

35


21.8

34.2

28.9



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13 March 2014


NTN-B (IPCA inflation-linked bond)




Interest rate: 6% p.a. Time to maturity: Liquidity date (inclusive) until maturity date (exclusive)

Interest: 29.56301410 per semester Negotiation: Yield-to-maturity (YTM)

77.682.6 86.4

50.660.9

2014 2015 2016 2017 2018*As of December 2013

Maturity/Outstanding Volume (BRL bn) Average Time to Maturity (Months)

50

60

70

80

90

100


57.0

95.0

91.9

Liquidity / Daily Average (BRL mn) Issuances, Monthly Average (BRL bn)

4.7

2.42.0

4.8

6.25.6

3.9

2007 2008 2009 2010 2011 2012 2013730 626 681

1121 1293 1557

3406535 457 272 250

449678

1873

4109

2006 2007 2008 2009 2010 2011 2012 2013

Up to 2 years 2 to 4 years More than 4 years

488

Coupon: Interest paid every semester

UNV:Adjusted nominal value (by the IPCA rate factor)

IPCA2: IPCA index number for the previous month

IPCA1: IPCA index number for the month prior to reference date

PR: Prorated adjustment of IPCA inflation forecast (% mom)

YTM: Yield-to-maturity (annualized for 252 business days)

NV: Nominal value on reference date (BRL 1,000.00)

UP: Unit price (market price for 1 bond)

bd: Business days between settlement date (inclusive) and maturitydate (exclusive).

Quote: Price as a percentage of Adjusted Nominal Value

Pricing

UNV

UPQuote=

(1 +YTM) 252

bdi

CouponUP +=

n

i=1

UNV

252

bdn

(1 + YTM)

PRNV UNV=IPCA2

IPCA1)(Coupon=

21

1- UNV+6%1



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13 March 2014


NTN-F (Fixed-Rate Bond)




Interest rate: 10% p.a. Time to maturity: Liquidity date (inclusive) until maturity date (exclusive)

Interest: 48.808848 per semester Negotiation: Yield-to-maturity (YTM)

Average Time to Maturity (months) Issuances, Monthly Average (BRL bn)

6.6

2.3

3.5

4.5

1.9 2.2

3.3

2007 2008 2009 2010 2011 2012 201322

28

34

40

46

Dec-07 Dec-09 Dec-11 Dec-1322.8

42.8

39.4

Pricing

NV: Nominal value (BRL 1,000.00)

Coupon: Interest paid every semester UP: Unit price (market price for 1 bond)

YTM: Yield-to-maturity (annualized for 252 business days) bd: Business days between settlement date (inclusive) and maturity date (exclusive)

Unit Price from Yield Yield from Unit Price

NVCoupon = -1)(1+10% 21

+( )2521+YTM

bdi

CouponUP=

n

i=1

NV

( )2521+YTMbdn

Liquidity / Daily Average (BRL mn)

31 208 23534

296 42813226 513

203

143

1778

123 12408

175150

42

1

2007 2008 2009 2010 2011 2012 2013

Up to 1 year 1 to 2 years 2 to 3 years



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6.3. Secondary MarketDespite the sizable stock of domestic debt, the liquidity of the secondary market is lowFrom 2009 to 2013, there was an increase in total liquidity, reversing the downward trendobserved from 2004 to 2008 (Exhibit 23). The recent increase was due to the growth intrading of fixed-rate securities (NTN-Fs and LTNs) and IPCA-linked bonds (NTN-Bs).

Exhibit 23: Daily Average Trading Volume in Secondary Market

Per bond and total, BRL billion

Others

LTN

LFT

NTN-F

1.0 1.2 0.9 1.0 1.9 2.03.5

7.7

0.6 1.01.7 1.6

1.1

2.0

2.51.1 1.2

0.6 0.6

0.8 0.80.7

3.2

1.26.7 6.2 4.4 3.7

2.53.1

3.43.0

3.9

7.2

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

4.1

8.2 7.66.3 5.9

4.7

5.7

7.7 7.5

9.3

20.2

NTN-C

NTN-B


The increase in volume was concentrated in securities with longer maturities. Part wasdriven by Provisional Decree 28116, published in February 2006, which exempted nonresident investors from paying income tax on the purchase of public securities. Themeasure affected mainly securities with longer maturities, especially above two years(Exhibit 24). The government made investments in fixed income securities by nonresidents subject to the Tax on Financial Transactions (IOF) in October 2009 and

increased the rate in 2010, but on a temporary basis; in early 2013, the tax rate on fixedincome portfolio inflows was once again reduced to zero.

Exhibit 24: Average Daily Trading Volume and Share of Securities Maturing inMore Than Two Years in Secondary Market

Per linker, USD million

Other

Fixed-rate

Inflation-linked

Selic% of total

0.7 0.5 0.5 0.4 1.41.01.1 0.8 0.5

1.1 1.83.2

6.4

1.0

2.22.1

2.0

4.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0.90.5 0.7

1.52.3

1.5 1.7

3.94.3

5.5

11.8

21.0

5.88.5

24.7

38.2

33.0

29.1

50.0

58.1 59.358.6

Source: Credit Suisse, Central Bank of Brazil

16Converted into Law No. 11312 in June 2006.


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As an alternative to the daily average, another measure of liquidity in the secondarymarket is turnover, defined as the ratio between the total value traded in the past 12months and the current debt stock. According to this criteria, there was also a sharpincrease in the liquidity of NTN-Fs until 2010, which has reverted in recent years.Meanwhile, the liquidity of LTNs dropped significantly as the relative importance ofthese securities has been surpassed by the higher issuances of NTN-Fs (fixed-rate

securities with longer maturities) and other securities, such as NTN-Bs. The turnoveof NTN-Bs, in particular, has recovered since 2010, after a decrease between 2006and 2008 (Exhibit 25).

Exhibit 25: Turnover of Public Debt Securities(Excluding Central Bank Portfolio)

% of outstanding volume

155

35

79

18

318

79

33

90

3

269

125

39

166

4

238

147

42

116

7

178

299

205 212

14

284

NTN-B LFT NTN-F NTN-C LTN

2006 2008 2010 2012 2013

Source: Credit Suisse, Central Bank of Brazil


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7. Private-Sector SecuritiesThe market of private fixed-income bonds has grown at a very strong pace in recent yearsbenefiting not only from the countrys macroeconomic stability but also from changes in

the legislation that have enabled the development of new credit methods.

The private sector issues many types of securities in the domestic market, especially

Certificates of Deposit (CDBs) and Non-Transferable Certificate of Deposit (RDBs), privatesecurities debt (debentures/corporate bonds), Banking Credit Notes (CCBs), Certificatesof Real Estate Receivables (CRIs), and Receivables-Backed Investment Funds (FIDC)The most significant are CDBs/RDBs and corporate bonds (Exhibit 26), even though thestock of the other securitiesespecially CCBs, CRIs (Exhibit 27), and FIDCshas beengrowing substantially in recent years.

Exhibit 26: Stock of CDB/RDBs and Corporate Bonds Exhibit 27: Stock of CCBs and CRIs

BRL bn BRL bn

Corporate bonds

CDB+RDB

43

44

85

155 2

10

248

283 3

38 3

97

505

585

152

126

283 3

29

362

684

768

782

683

598

546

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

CCB

CRI

45.

4

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0.

71.

72.

9 6.

7

12.

9

20.

5

18.

4

18.

2

22.

5

24.

7

26.

7

0.

6

0.

92.

1

2.

22.

97.

2 10.

6

18.

9

27.

8 33.

4

Source: Cetip, Brazilian Association of Financial Market Institutions (Andima), Credit Suisse Source: Cetip, Credit Suisse

7.1. CDBs and RDBsCertificates of Deposit (CDBs) and Non-Transferable Certificates of Deposit (RDBsare private securities issued by financial institutions (commercial, developmentinvestment, and full-service banks) with the aim of raising funds in the market fofinancing commercial credit operations, with negotiated rates and maturities. CDBsrepresent the vast majority of these two securities in the market (99%), especiallysince RDBs are not transferable, i.e., they cannot be traded in the secondary market,whereas CDBs do not have this restriction. This is the main reason why there is a lowstock of RDBs vis--vis CDBs (Exhibits 28 and 29).


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Exhibit 28: Stock of CDBs Exhibit 29: Stock of RDBs

BRL bn BRL bn

152 126

281326 360

682

767 782

683

598546

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

2.5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0.3

0.8

1.7

2.12.0

0.90.7 0.7

0.8

0.4

Source: Cetip, Credit Suisse Source: Cetip, Credit Suisse

CDBs, like RDBs, may be fixed-rate or linked to an index (95% of the total in Decembe2013), while fixed-rate securities represent only 5% of the total (Exhibit 30). Thecomposition of the stock of these securities has remained roughly constant in recent yearsThe CDB rate is calculated based on a year of 252 business days, as are the CDI and

Selic rates.

Exhibit 30: Stock of CDBs and RDBs, by Index

BRL bn

Floating rate

Fixed-rate

8143

262308 340

654739 763

665

584 521

9

2121 22

30

29 19

19

15

26

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013119

684

770 782

684

599547

362329

283

127152

Source: Cetip, Credit Suisse

Trading in CDBs is done mainly on the over-the-counter (OTC) market and registered withthe Cetip clearinghouse, with settlement on the same day (D+0) or on the next day (D+1)The liquidity of the secondary market of CDBs is very low (Exhibit 31), and the averagevolume of daily trades as a percentage of the total outstanding volume dropped from 52%in 2004 to 8.2% in 2010, increased to 16.1% in 2012, and declined again to 7.9% in 2013.


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Exhibit 31: Daily Trading Volume of CDBs in Secondary Market

BRL mn and % of total outstanding volume

61

169

259280

260 279

668

343

257 262

384

17019.1

28.2

52.0

25.0

19.8 19.3

24.9

11.28.2 9.6

16.1

7.9

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Daily average (BRL mn)

Total value of tradingas % of stock

Source: Cetip, Credit Suisse

7.2. Corporate Bonds

Corporate debt bonds (locally referred to as debentures) are generally issued by largecompanies whose aim is to raise longer-term funds to finance projects and/or adjustmentsin their capital structure. These bonds can be issued only by companies formed as publiclyor privately held joint stock corporations. However, only publicly traded companies canmake issuances for general investors (public issuances), while unlisted companies canonly issue securities to a restricted group of investors (private issuances).

Corporate bonds may pay periodic coupons, at fixed or floating rates or even linked to FXor inflation indexes (especially the IGP-M). In general, corporate bonds pay a risk premiumin the form of a fixed spread or a percentage over the CDI interest rate, which reflectscompanies risk classification. Debenture contracts include special clauses that define

types of guarantee, possibilities of repricing debts 17 , convertibility into shares, earlyredemption, etc. The bonds may be issued without a fixed period for the redemption of theprincipal amount (perpetual bonds).

The stock of corporate debt bonds in the domestic market has augmented significantlysince 2005, but the composition of this expansion has changed greatly. In early 2009, theBrazilian Securities Commission (CVM) implemented rules for a new type of public offeringof private securities such as non-convertible corporate bonds, commercial paper, andCCBs. These offerings are referred to as restricted efforts distributions (per CVM Directive476 (ICVM 476)), involve less paperwork, and can be made only to qualified investorsIssuances under this regulation do not need to be registered with the CVM until the end ofthe distribution process. Accordingly, the offering process has become much faster andshould explain the significant rise in these distributions share of total bond issuances(Exhibit 32). There are also a few restrictions on this kind of offering. For instance, the

number of investors the issuer can approach for the bookbuilding process is limited to 50,only 20 of those can participate in the offering, and the securities can only be traded 90days after the initial purchase.

17Repricing is a mechanism used by the issuing companies to periodically alter (in accordance with theclauses negotiated in the issuance) the terms agreed upon with the holders, to adjust the bonds to markeconditions. If investors do not accept the new conditions proposed by the company, the company wilhave to acquire the bonds in advance.


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Exhibit 32: Issuances of Corporate Bonds

BRL bn

15 15 5 10

42

69

48 40

12 16 3

50

11

15

36 59

72

80

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Restricted efforts distribution

Pubic offerings

Source: Brazilian Association of Financial Market Institutions (Andima), Credit Suisse

Regarding the classification of bonds, the bulk available in the market is formed of bookentry bonds, linked to the DI interest rate and not convertible into shares of the issuingcompany, with a guarantee subordinated to the other creditors of the company

(Exhibit 33).

Exhibit 33: Main Classifications and Features of Corporate Bonds

Form % of total

Convertibility

Guarantee

Book-entryCustody and book-entry processes carried out by a financialinstitution duly authorized to operate by CVM 99.6

Registered Registration and control of transfers made by issuing company 0.4

Non-convertible Not exchangeable for other assets 99.9

Convertible Exchangeable for shares of issuing company to settle the debt 0.0

JuniorNo priority over other creditors of the company;priority only for shareholders

54.8

Unsecured debtNo priority in disposal of company assets in the event of compositionwith creditors 38.0

CollateralSecured by assets of issuing company or third parties (pledge, lien,or receivables)

5.9

Floating-rate

Priority of bondholders to dispose of assets of issuing company in the eventof bankruptcy; company may transfer assets without prior authorization ofcreditors

1.3

91.4

5.6

0.7 1.1 0.21.0

DI IPCA IGP-M TR USD Other

Source: Brazilian Association of Financial Market Institutions (Andima), Credit Suisse


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Trading in the secondary market is carried out on the trading floor or on an OTC market, byinstitutions authorized to operate by the central bank and by the CVM. The NationaDebenture System (SND), an entity run by Cetip based on the policies and directivesestablished by the Brazilian Association of Financial Market Institutions (Andima, Appendix

A), concentrates practically the entire volume of these securities traded in the secondarymarket. The BM&FBovespa stock exchange also has systems dedicated to the trading ofixed-income bonds in general, including corporate bonds, namely BovespaFix (an electronic

system run by orders) and SomaFix (OTC market). Investors interested in buying corporatebonds must do so via a financial institution authorized to operate in these markets.

In order to foster investments in infrastructure and in intensive economic production inresearch, development, and innovation, at the end of 2010 the government createdvarious incentives for private investments in such areas. Such incentives, laterconsolidated under Law No. 12431/2011 of June 2011, include a reduction in the rates ofthe Income Tax (IR) applicable to earnings of individuals, legal entities, and foreigninvestors originating from bonds issued by Specific-Purpose Entities (SPEs) formed toimplement such projects (Law No. 12431/2011) . Income tax payable by individuals andforeign investors was reduced to 0%, while the corporate income tax was reduced to 15%

In September 2012, the Brazilian Development Bank (BNDES) announced new measures

to incentivize the issuance of these bonds. The measures seek to lower the issuers cosof funding for these bonds. For those who buy the bonds, the initiatives expandguarantees and reduce investment risk. According to the new rules, the bond issuancesmay, at the discretion of the BNDES, share guarantees with potential loans taken out bythe bank for the same project. Another change is the inclusion of a cross-default clauseregarding loan agreements and potential public issuances for the same infrastructureproject. In other words, if the company defaults on the bond payment it will be blockedfrom taking out additional loans from the bank. According to the clause, the BNDES candeclare early maturity of a loan if there is any type of nonperformance in connection withthe bonds. Accordingly, the clause increases the security of the market participants owingto the relative importance of the BNDES as a long-term financier of projects.

7.3. Agricultural Cash Forward Contract Bonds (CPRs)CPRs are used to finance transactions in agribusiness. They can be issued by farmers ocooperatives and are negotiable on the secondary market.

Regarding settlement, there are two types of CPR:

Physical CPR: Settlement occurs upon physical delivery of the product. The CPRestablishes the quantity, place, and date of product delivery. The terms of the contracmay be amended by mutual agreement between parties.

Financial CPR:Settlement occurs via transfer of funds from the issuer to the buyer onthe securitys maturity date. The settlement amount depends on the specificationsestablished in the contract. In general, CPRs consider the selling price of the agriculturaproduct on the settlement date. There are also Financial CPRs whose amount payable

is defined at the time of issuance (Fixed-Price Financial CPR) or pegged to futurecommodity prices or a futures exchange, especially the BM&FBovespa.

The law allows CPRs to have various types of guarantees. The most common arefiduciary alienation and pledge of crops, herds, and/or agricultural implements andequipment. Some CPRs are secured by bank bonds or insurance policies. Due to the highcost of bank guarantees, most CPRs are secured by bonds issued by farmers themselves.

To be traded on the secondary market, CPRs must be registered with a custodiainstitution, especially the Cetip clearinghouse. CPRs are registered according to thephysical volume of the product they refer to, but they do not state the financial value of the


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transaction. The liquidity of CPRs in the secondary market is very low, with many dayslapse without any activity. Additionally, average maturities are short, as these securitiesare settled in the next harvest.

7.4. Certificates of Real Estate Receivables (CRIs)CRIs are traded without restrictions; they are issued by securitization companies and

backed by operations that involve rights to real estate (most commonly credits related tothe sale of new properties, see Exhibit 34). However, the broad definition of the real estaterights that serve as collateral enables the CRIs to be used not only to implement new reaestate projects, but also to deploy companies capital and enable the disbursement ofunds for investment activities.

Exhibit 34: Flowchart of Issuance of CRIs

Collectingbank

Contract

$

CRI

$Property sold

Contract

$

Payment ofinstallments

$

$

Amortization andInterest

1 2 3

4

Securitizationcompany

InvestorsBuyer Real estate

developer


Although CRIs were implemented in 1997 (Law 9154), only recently have they started tocontribute more significantly to growth in home loans18andlike corporate bondssee aboost in originations driven by ICVM 476 (Exhibit 35).

Exhibit 35: Volume of CRIs Issued

BRL bn

Restricted efforts distribution (ICVM 476)

Public offerings

0.2 0.1 0.3 0.4

1.5

4.8

2.3 2.3

3.7

3.2 1.7

0.9

5.5

9.5

6.98.1

3.1

7.7

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

2.1

1.1

13.2

10.1 9.8

Source: Brazilian Securities Commission (CVM), Credit Suisse

18CRIs can be issued exclusively by home loan securitization companies and are generally composed ofvarious Real Estate Credit Notes (CCIs), which represent credits issued by the lender.


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The increase in the volume of CRIs in the last decade has been fostered by the morefavorable macroeconomic scenario, declining real rates, the expansion of home loans andcertain legal and tax changes, especially:

Creation of pool of assets available as security for debts or obligations: Since2004, each real estate project must have its own capital and separate accountingfrom the operations of the developer. If the real estate developer goes bankrupt, the

owners of the properties can retain a different company to conclude the projectThus, a CRI investor is not exposed to the risk of potential liabilities of the realestate developer, but only to the risk of the operation that generated the home loan.Hence, the main concern of the investor is the financial capacity of the originaborrower, whose flow of payments will be applied toward settlement of the security.

Fiduciary alienation (al ienao f id uciri a): This institution governs the transfer oownership to the borrower (buyer of the property). The buyer is the contingent owner,

meaning that full ownership is obtained only when the loan is fully paid off. If payment othe loan is interrupted, the lender can recover full ownership and possession of theproperty without filing suit. Fiduciary alienation for home loans does away with the needto collect overdue debts in court, enabling extrajudicial enforcement of the guarantee.

Income tax exemption:Since January 2005, individuals are exempt from income taxon net gains earned on CRIs as well as Real Estate Bills (LHs), and Real EstateCredit Notes (CCIMs). Corporate and institutional investors are not exempt fromincome tax.

In December 2010, the Ministry of Finance announced a package of measures tostimulate private long-term credit. It exempts foreign investors from income tax onearnings on CRIs that fulfill certain requirements (e.g., average term greater than fouryears, impossibility of early redemption, and link to a government-approvedinfrastructure investment project). The government also allowed CRIs to be bookedaccording to the rules for the allocation of savings deposits.

The new legislation led to a significant reduction in costs and, especially, in theaverage time for recovery of properties in connection with non-performing loans. Thereare no official statistics on the average recovery time for properties, but some issuerssuggest it is nearly six months (Exhibit 36).


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Exhibit 36: Timetable for Recovery of Real Estate

T+15Second telephone call to verify whether the problem persists and the borrower intends to makepayment. Verification of receipt of the collection letter and possibility of renegotiation. Paymentdeadline is T+30.

T+30

Third phone call to make the borrower aware that if payment is not made within ten days, anofficial collection notice will be sent. Status reported to securitization company.

T+40

First collection notice, sent by registered letter, notifying the borrower of the debt amount.

T+60

Second collection notice, sent by registered letter, notifying the borrower of the debt amount anddemanding payment within 20 days.

T+80Letter sent to the appropriate Real Estate Registry Office to officially report the arrearage andother costs. A 15-day period is granted for the borrower to settle the arrears at the Real EstateRegistry Office.

T+83

If Real Estate Registry Office is unable to locate the borrower, a formal collection notice ispublished in the newspaper.

T+98

After payment of the Municipal Tax on Property Transfers (ITBI), ownership of the property isvested in the securitization company by Real Estate Registry Office.

T+110

Public auctioneer retained; publication of Invitation to Bid at first auction.

T+128

First public auction held (for at least the real propertys appraisal value).

T+130

Invitation to Bid at a second auction is published, if necessary.

T+133

If property is sold, the difference between the amount of the winning bid and that of the debt pluscharges and expenses is returned to borrower.

T+143

Second public auction is held (awarded to highest bidder, as long as the bid covers the debt plusexpenses and charges).

T+148

If the property is sold, the difference between the amount obtained at the auction and the debtplus all expenses and charges is reimbursed to the borrower.

If the property is not sold at the second auction, a debt settlement instrument is issued by thesecuritization company considering the debt paid and releasing the borrower from further liability.

T+5

Telephone call to inquire about the delay and schedule a new payment date, no later than T+10.

T+10

First collection letter sent out.

Source: Fitch Ratings, Credit Suisse


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Box 1: Certificate of Additional Construction Potential

The Certificate of Additional Construction Potential (Cepac) is a security subject to CVMregulation, whose contract affords buyers the right to:

build in urban areas above the standard limits on land occupation (e.g., total occupied

area or maximum height of buildings); or change the real estate property use in relation to that established in land occupation

laws.

Cepacs are used by municipal governments as an additional source of funding for urbaninfrastructure works in certain areas. The municipal government defines, for a specificregion of the city, a list of projects for urban improvement (e.g., construction of overpassesand squares) that ultimately tend to increase the value of the properties in those regionsDuring execution of the listed projects, the municipal government auctions the Cepacs tofund part of the construction. Then, Cepac buyers become entitled to perform constructionbeyond the legal limits.

Cepacs do not create any liability for the issuing municipalities and issuances may be

public or private. The acquired rights are specific to each operation and cannot betransferred to constructions on plots of land belonging to other regions of the city. Thesesecurities may be traded on the secondary market and ownership does not require thebuyer to own plots of land or buildings in the regions to which the securities are related.

Cepac prices vary according to expected changes in property prices in regions wherepublic projects will be executed. In addition to the risk of prices in areas benefited by publicworks not appreciating, one of the main risks associated with Cepacs is the risk osignificant changes in the master plan, for instance if the municipal government increasesthe maximum permitted height of buildings, which reduces the value of the additionaconstruction rights.

As of September 2007, two urban operations had been registered with the BrazilianSecurities and Exchange Commission (CVM), both by the City of So Paulo: gua

Espraiada and Faria Lima. The first Cepac was issued in July 2004 via an auction held onthe over-the-counter market (Soma) of the So Paulo Stock Exchange (Bovespa), totalingBRL 30mn allocated to the construction of a bridge within the gua Espraiada operationSince then, more than BRL 609mn has been issued to finance this project, out of totalpotential funding of BRL 1.1bn until 2019 (54% of total). The Faria Lima operation raisedBRL 701mn of total potential funding of BRL 715mn (98%).

By the end of 2010, another Cepac had been registered with the CVM, with the objectiveof improving urban development in the neighborhoods around the Rio de Janeiro harboraiming to attract more residents and commerce to the area. The reurbanization projectincludes the construction of tunnels and avenues, improvement of urban transportationand power, sewage, and telephone networks; a total of BRL 2.6bn in potential funding wasissued through Cepacs.

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