The introduction of the onshore note wrapper in Brazil, Certificado de Operações Estruturadas (COE), still subject to regulatory approval, will result in an extension of maturities across the structured products market, according to head of derivatives, products and structuring at Itaú BBA, Felipe Colin.
Colin told SRP that the transparency the onshore note would bring to the market will allow clients to have a greater understanding than they do with existing wrappers in Brazil. "The transparency and simplicity within an onshore note will result in clients becoming more accepting of more extended investment periods," said Colin.
"As a result of low interest rates in Brazil, there is a higher re-investment risk and the natural tendency is to make maturities longer," said Colin. Itaú BBA is currently attempting to extend investment periods and understands that the COE would be an ideal instrument for doing so in the future. "It will also be a great instrument to educate clients and play markets they have not already delved into," he said.
Much of Itaú BBA's current structured product business is exposed to either the Ibovespa or the S&P500. "We are very careful with communications in explaining these products to our clients and feel that with more familiar underlyings, people understand the make-up of the product much better," concluded Colin.
Structured products in the Brazilian market tend to be offered in swap or fund format as, due to existing domestic tax rules, structured notes are not an attractive proposition, according to market players.
Structured notes, which usually consist of a derivative and a fixed-income security, need to be split into two parts for accounting and tax purposes.