Exclusive: B3 - Foreign providers have taken the Brazilian market to a different level

The Brazilian market saw the launch of structured notes – known as certificados de operações estruturadas (COEs) - in 2014. SRP caught up with Fabio Zenaro (pictured), director of product desk, commodities and new business at Brazilian stock exchange operator B3, about the state of the domestic market and how Brazilian investors perceive structured investments.

B3 is the company resulting from the integration between the former stock exchange BM&FBovespa and Cetip, the former clearing house authorised by the Central Bank of Brazil to list structured notes.

How would you describe the structured product market in Brazil?

Fabio Zenaro: The first thing you have to take into account is that the macroeconomic conditions in Brazil have changed significantly. We are now at the lowest level of interest rates in Brazil in terms of what we call the basic interest rate which is around five percent. For Brazil this is a very low level.

Brazilian investors were very much focused on fixed income products because the level of the interest rates was much higher

During the last two years, investors have started to look for new investments. Brazilian investors were very much focused on fixed income products because the level of the interest rates was much higher, and these products provided yield. This has slowdown the growth of structured products but this is going to improve over the next few years as the macro economic conditions are very much supporting this shift towards structured products.

The second point is that the Brazilian structured product market is dominated by foreign issuers, as we see in other markets such as Europe and the US. Foreign investment banks entered the Brazilian market about three years ago now and established the foundations for the market to grow. Each year, each month, we see new kind of structured products, new payoffs, which is definitely very good for the market and the end investor.

What would you say are the key elements behind the market growth?

Fabio Zenaro: From an investor standpoint, education is making a difference as the more investors know and learn about structured products the more they use them. Distributors are doing a lot of work in this regard. When we put all this together, it is very good news for the market. My outlook is positive. I believe the market will really move forward in the coming years.

How has the competitive landscape changed since the first products were launched in Brazil five years ago?

Fabio Zenaro: This is something that it is changing continuously. At the beginning, during the first two years of activity in the COE market, because of regulation, issuance was dominated by domestic banks, which also controlled the distribution. That was because there was no specific legislation for distributors at that time.

Since 2016, this has changed and the market opened up to foreign banks which started to play a very important role and moved the market into a different level. They are the main issuers today, and their market share is much higher than the market share of local banks. The distribution set up changed too as independent distributors were allowed into the market. Local independent distributors have played a very important role.

Which underlyings are investors in Brazil looking for? Do they favour domestic assets?

Fabio Zenaro: Regarding the use of underlyings, the Brazilian market has gone through three phases. In a first phase, structured products favoured local assets, especially interest rate and inflation. After that, because of political issues, we saw a shift towards structured products linked to FX because of the volatility in the markets.

What we have seen the last few years - the third phase, is an increase of new underlying assets on the back of new investor demand. Investors are looking for something different, for something to diversify their investment portfolios, so they started to look at foreign assets, especially stocks and equity indices. We have had some products linked to commodities too but like in most countries equities dominate. The Brazilian investor is starting to search for diversification, and structured products are providing an answer to investors’ needs.

What is the unique selling point for structured products in Brazil?

Fabio Zenaro: First of all, investors cannot get anymore the 12-15% interest rates they used to get in the past, and that has had an impact on the products they use to focus on. Interest rates in Brazil are now at five percent and going down. From a Brazilian perspective, this is very low so investors have found in structured products an alternative to diversify form fixed income but also benefit from new opportunities for yield. Brazilian investors have realised that structured products are a very cheap and efficient way to invest in foreign stocks, for instance.

Do you think that the thematic element of structured products resonates with people?

Fabio Zenaro: Any structured product with a thematic logic will appeal retail investors. Even if you as an investor don’t know exactly how the company is, you still have an idea that, for example, technology is the future, so it makes sense to put some money in technology companies. That kind of thematic is working very well in Brazil now.

What is the mentality of the Brazilian investor?

Fabio Zenaro: For me this has been a very big surprise. If you had asked me five years ago, I would have said the market would change. At that time, almost all structured products had capital protection and I thought this would change. However, capital protection remains a very strong characteristic of structured products and is greatly appreciated by the Brazilian investor who are in general risk-averse.

Do you think the market will also evolve and target more opportunistic investors with leverage/inverse type of structures?

Fabio Zenaro: We have some structures like this already. These are aimed at professional or private banking investors. This kind of investor is more prepared for capital at risk investments. But the general retail investor is not ready to use non-capital protected products.

What would you highlight of this year’s activity in the market so far?

Fabio Zenaro: Investors in Brazil, especially because of the macro economic conditions, have been encouraged to look for new kinds of investments. When we think about that, we are thinking about plain vanilla, such as stocks, but we are also hearing from the banks that structured products are gaining momentum as one of the main products people are investing in. Investors see them as a very good alternative.

We strongly believe that the structured products market is going to improve in Brazil because of the market conditions. As education transpires to the market, investors understand the risk-return trade-off of these products. We think this is key to grow the market .

Is the regulatory framework good enough for the market?

Fabio Zenaro: We believe so. There is a public consultation from CVM at the moment to make some improvements. We think we have a good regulated framework and we don’t have any complaints in terms of guidelines and regulations.

Is there room for more manufacturers, more distributors?

Fabio Zenaro: Today there are around 20 distributors active in the market. This is a healthy number to promote competition. The same goes for issuers. We don’t think this will change significantly although there’s room for more players.

I believe that local banks are improving their share in the market and trying to establish themselves by offering different structures. They are trying to differentiate from foreign providers when it comes to underlyings, especially for foreign assets, and by deploying more exotic structures such as autocall, digital, [and features such as] barriers, etc.

The market is moving from a plain vanilla set up dominated by local banks to a market, which is very different and competitive.