The growth of the structured notes (certificado de operações estruturadas – COE) market in Brazil has been limited by restrictions around the target audience and restricted supply to the institutional segment. However, Central de Custódia e de Liquidação Financeira de Títulos (Cetip), the regulator, has been working with issuing banks to create a regulatory framework for the public distribution of these products. SRP spoke to Fabio Zenaro (pictured), products superintendent at Cetip, about the current state of the COE market and how the new public distribution framework will be a key element in developing the Brazilian structured retail products market.
How would you describe the current COE market?
The Brazilian COE market is still building its foundations and we believe COEs will become a mainstream investment product in a few years. Public distribution has not been approved by the regulator yet but we have heard that the CVM (the domestic securities regulator) is working on new guidelines and there could be an announcement about legislation on this subject within the next few weeks.
At Cetip we believe that once public distribution is approved the COE market will enter a new stage of development. Currently there are 14 banks involved in the issuance of COEs at different levels with five already issuing products almost daily, others issuing products frequently and others that are coming in and out with ad hoc products. We believe this is to do with the fact that foreign banks which have a track record and significant expertise with these kind of products are lacking distribution capabilities in the Brazilian market.
Is the lack of a public distribution market limiting the growth of this market?
Without a public distribution framework these banks cannot leverage their knowledge and reach a critical volume of private banking investors. They are in the game but not at the level they would like to be as they would like to be able to cover the whole market. Once public distribution is approved they will be able to tap into the wider market via brokerage and asset manager firms that have been traditionally involved in fixed income distribution but that are keen to expand their reach to other investors as well as increase their product offering.
What kind of products are driving activity in the COE market?
We have two types of structured notes in Brazil. On the one hand capital-protected structures and on the other structures with soft protection. However, at this stage capital-protected structures represent over 95% of the market. COEs are a new type of investment and issuers are being cautious with the initial focus on products that protect the initial investment. This is also being used as a selling point as investors seem to appreciate the fact that capital is protected but they can get exposure to the capital markets via different asset classes.
There are a few restrictions in relation to the types of assets being used but at the moment the market is dominated by inflation-linked COEs (Indice Nacional de Preços ao Consumidor Amplo (IPCA) and Índice Geral de Preços-Mercado (IGPM)), FX-linked structures (especially US dollar and euro) and products linked to international equity indices (S&P 500, Dax, Eurostoxx 50).
How would you describe the competitive landscape in the COE market?
The COE market is dominated by local banks and some international issuers. Because of the existing limitations in terms of distribution, Brazilian banks have an advantage but once public distribution is approved we think foreign banks will benefit as they will be able to approach local brokerage and asset management firms to sell their products. We see this as a win-win situation for issuers as they will be able to tap into retail distribution networks, brokers and asset managers will be able to add a new product to their offering and investors will be able to access and get exposure to a whole range of assets.
Note: Due to legal restrictions Cetip is not allowed to disclose the names of the banks active in the COE market which include domestic players such as Bradesco, Itaú Unibanco, Safra, Banco Votorantim and Banco ABC Brasil, as well as foreign banks including Bank of America Merrill Lynch (BAML), HSBC, BNP Paribas, JP Morgan, Citi, Morgan Stanley, Goldman Sachs, Santander and Deutsche Bank.
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