COE providers move to diversify

Providers of structured notes in Brazil, locally known as certificados de operações estruturadas (COEs), are moving towards diversification in terms of risk and investment terms as the market moves a step forward following the introduction of these products in the Brazilian market earlier this year.

According to the Central of Custody and Financial Settlement of Securities (Cetip), the clearing house authorised by the Central Bank of Brazil and the Securities and Exchange Commission, (CVM) COE sales have now reached BRL3bn this year.

Fabio Zenaro, executive manager of products at Cetip, told SRP that the market is leaving behind the “experimentation” stage and is ready to move forward.

“From the customer’s perspective, the main advantages [offered by COEs] are the possibility to diversify their portfolio of investments with investments referenced to offshore assets, which was only possible for investors in Brazil holding foreign accounts, which can be a little bit expensive and more complicated,” he said. “Even for some types of assets in Brazil [such as FX and commodities] the access for individuals are more restricted, so COE is a nice possibility to invest in a wide variety of markets.”

Protection and terms
Cetip said earlier this month that issuance of COEs has been characterised by structures with capital protection with 4% of them referenced to foreign, mainly US and European, indices or shares.

“When we discuss opportunities for COEs, the decision was to design a product and test it among investors with a maturity of up to one year and with less risk,” said Claudia Getschko, executive superintendent of treasury products at Santander Brazil. Getschko said that another strategy adopted by the bank, which does not disclose the amount raised via COEs, was to always offer two products with the same underlying asset to address different risk profiles.

“The consolidation of the market will lead to greater diversification,” she said, adding that Santander plans to launch new COEs between September and October.

According to Luis Kondic, superintendent, product treasury at Citi Brazil, as the market extends its footprint in the country there will be a greater variety of product structures.

“We work with various assets such as interest and inflation rates, but we see increased investor interest in products linked to the US dollar and individual stocks,” he said.

Kondic added that Citi has also started to offer greater diversification on the product’s risks. “The majority [of our COEs] are 90% protected, but now we also offer capital-at-risk and partially protected structures.”

The key when developing the bank’s COE offering is always to observe the bank’s policy on suitability to risk. Kondic also said that regarding investment terms products linked to shares have increased their horizon to between one-and-a-half and two years, while products linked to inflation are now featuring investment terms of between three and five years.

Public offering
Both Citibank and Santander are awaiting authorisation from the CVM for retail public offerings, which is expected to be granted in early 2015.

“[This] will increase competitiveness among banks because small and medium providers have a significant branch network to offer the product and may distribute them via brokers,” said Getschko.

Kondic said that once public distribution is allowed the bank will be able to offer them via its own commercial network or via brokers. “We are evaluating this possibility,” he said.

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COE providers move to diversify