Guide to Brazil Local Markets - Credit Suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND

ANALYST CERTIFICATIONS.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™

Client-Driven Solutions, Insights, and Access

Guide to

Brazil Local Markets Economics Brazil

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

of Brazil’s 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 financial

market data and real-time quotes.

13 March 2014

Economics 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 6345

[email protected]

Leonardo Fonseca

+55 11 3701 6348

[email protected]

Daniel Lavarda

+55 11 3701 6352

[email protected]

We acknowledge the significant assistance from

Pâmela Borges, Felipe Leon and Túlio Sousa

in the preparation of this report.

13 March 2014

Brazil Local Markets 2

Table of Contents

Summary 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. Brazil’s 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 (Precatórios) ............................ 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 Investor’s Registration with the CVM 68

Appendix D: Brazil Local Markets in LOCuS 71

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

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

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

13 March 2014


Summary This Guide to FI Markets in Brazil explains in detail the operations of Brazil’s fixed-income

financial market. It describes the main financial assets and instruments traded locally

(bonds and derivatives) as well as the applicable taxes. It also contains important

information 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 market,

whether fixed-rate or linked to a floating interest rate or inflation index; information is also

provided 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), and

Treasury Bills (LFs)) and by companies in general (bonds);

assets backed by credit receivables, especially Banking Credit Notes (CCBs) and

specific receivables such as Certificates of Real Estate Receivables (CRIs); there is also

a description of Receivables-Backed Investment Funds (FIDCs), which raise capital for

the acquisition of receivables to be traded on the market in the form of fund shares;

precatórios, which are judicial requisitions to treasuries for budget appropriation and

payment of money judgments against public entities; these instruments are classified as

receivables, and the attached rights can be assigned to a third party by the respective

holders;

derivatives, the main financial derivatives traded on the securities, futures, and

commodities exchange and on over-the-counter markets; these derivatives include

swaps involving interest rates, exchange rates, and inflation indexes as well as option

contracts.

For each of these assets, we provide the yield calculations and data on volumes,

secondary-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-income

market. The second presents the main institutions that comprise the Brazilian financial

system and their roles, described in further detail in Appendix A. The following section

presents Brazil’s foreign exchange market and describes the main currency trading

platforms and the PTAX exchange rate calculated by the central bank and used as a

benchmark for settlement of onshore and offshore contracts indexed to the USD. In the

fourth section, we present the main interest rates used in the domestic markets, especially

the Selic basic interest rate, used to guide monetary policy, and the Certificate of Interbank

Deposit (CDI) rates. The fifth section contains an overview of the main inflation indexes

used in Brazil. A more extensive discussion of these indexes can be found in the Brazil

Inflation Guide, first published on June 25, 2009. The main features of public and private

fixed-income securities are presented in detail in sections six and seven, respectively.

Section 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. In

Appendices B and C we present the main procedures a foreign investor needs to follow in

order to qualify to trade in the local market. Finally, Appendix D contains a guide to the

pages on Brazilian fixed-income markets within the LOCuS system, which can be

accessed by Credit Suisse clients.

13 March 2014


1. Introduction The flow of foreign portfolio investments into the main emerging economies has grown

significantly in recent years (Exhibit 1). Historically, foreign investors’ financial investments

in Brazil have been heavily concentrated in equities. Nevertheless, the share of foreign

investments in fixed-income securities has increased since the mid-2000s (Exhibit 2). We

believe this movement will continue in the coming years, owing mostly to the continued

wide gap between domestic and international interest rates and the withdrawal in June

20131 of the 6% Tax on Financial Transactions (IOF) levied on these investments since

October 2010.

Exhibit 1: Net Foreign Portfolio Inflow into Debt Instruments

Exhibit 2: Breakdown of Stock of Foreign Portfolio Investments in Brazil

USD bn % of total, USD bn

2008

1 2

8 6 510

3

1014

5

13 15

79

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

60

50

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 Brazil

continues to rise, although current levels are somewhat lower than in other emerging

markets (Exhibit 3). The higher share of foreign investors in government securities has a

positive impact on the domestic debt profile. Compared to local investors, foreigners are

usually more prone to invest in fixed-income securities with much longer maturities. Hence,

the increase in the participation of foreign investors has contributed to an extension in the

maturities of government debt.

In addition to their impact on the maturity profile, foreign investors help increase liquidity in

the secondary market, particularly for instruments still sparsely used in Brazil, notably

bonds backed by credit receivables.

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

13 March 2014


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 to

encourage long-term financing. The measures were structured in two main parts: tax

incentives 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 measures,

households and foreign investors purchasing local corporate bonds that meet certain

criteria became exempt from income taxes and the IOF tax2.

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

13 March 2014


2. Financial System The basic features of Brazil’s financial system were established through a series of

institutional reforms that started in 1964/65 with the creation of the National Monetary

Council (CMN) and the Central Bank of Brazil and ended in 1976 with the creation of the

Brazilian Securities Commission (CVM).

Additional measures to restructure the financial system involved regulations to separate

proprietary trading from asset management (information barriers), the introduction of

compliance departments within financial institutions, the creation of a credit risk center,

new directives to control market risks and interest rate risk (already applicable to foreign-

currency transactions), and the reform of securities market legislation—which increased

the participation of minority shareholders in company decisions and introduced corporate

governance practices.

Exhibit 4 illustrates the institutions operating in the Brazilian financial system and agencies

in charge of oversight and regulation. The role of the major regulatory and oversight

agencies 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

13 March 2014


3. Exchange Rate The Brazilian exchange rate system is a dirty float system. The central bank actively buys

and sells dollars both in the spot and derivative markets. According to the monetary

authority, the interventions in the FX market aim to cover a lack of liquidity and ensure that

the market functions properly. To make the system more transparent, the central bank

intervenes in the market through primary dealers3, disclosing information to the market on

weekly basis, generally on Wednesdays4.

In 2005, the National Monetary Council (CMN, Appendix A) concluded the process of

unifying Brazil’s FX markets. Under the new regime, the differences in legislation and the

commercial5 and tourism

6 rates were eliminated. Virtually all exchange rate transactions

must be registered with the central bank; however, unification of the FX markets significantly

simplified transactions involving foreign currencies and reduced red tape, especially for

offshore remittances.

Under the previous system, each type of transaction required a different set of documents.

With the unification of the markets, the documents necessary for FX transactions ceased to be

classified by type. Moreover, the financial institution carrying out the transaction is responsible

for 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 be

made on the São Paulo Securities, Commodities, and Futures Exchange (BM&FBovespa,

Appendix A), on the over-the-counter (OTC) market, or at foreign exchange

clearinghouses. 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 trading

system that allows parties interested in buying and selling dollars to make bids through a

broker or a bank, which are responsible for sending accepted orders to traders at the

BM&FBovespa for execution. Although this market provides more transparency and safety

in 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 spot

dollar market were carried out only in the interbank FX market, between brokerage firms

and banks authorized to operate by the central bank.

3 The 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 swap functions in each period. The number of dealers may also change between periods. The central bank uses 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 the

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 for

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

4 The Treasury also buys dollars in the market to cover external debt obligations. The Treasury’s purchase operations are made using Banco do Brasil.

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

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

13 March 2014


PTAX Rate

The PTAX is the official exchange rate used for settlement of financial contracts indexed to

the dollar. It is used as a benchmark for USD-linked onshore and offshore contracts (for

instance 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 is

the arithmetic average of the rates obtained in four daily consultations of exchange dealers.

Consultations 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 rates

effectively 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 1:00

p.m. (local time).

Government Intervention

As a response to the post-crisis BRL appreciation, the government implemented

measures aiming to reduce excessive volatility of the local currency. However, the

majority of these measures have been reverted since June 2012, following the

significant depreciation of the BRL in 2Q12 (from BRLUSD 1.80 in March to 2.05 in

June) and in 2013 (BRLUSD 2.45 in August). The main interventions in the FX market

during 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 non-

residents 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 of

BRL 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 a

fixed-income asset. In this case, the investor would have to pay the IOF tax as well. The

IOF 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), in

October 2009. In November 2009, the levy on investments in ADRs was reduced to

1.5%. The IOF rate on investments in equities traded in Brazil was reduced from 2% to

0% 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 2011,

the reserve requirement was implemented on 60% of the short positions in dollars that

exceed the lower of USD 3.0 billion and the institution's Tier-1 capital. The reserves are

deposited at the central bank in local currency and are not remunerated. The upper limit

was lowered to USD 1.0 billion in July 2011. In June 2013, the government cancelled the

reserve requirements for banks’ short positions in dollars entirely.

Taxation of foreign loans: In March 2011 the Tax on Financial Transactions (IOF) was

charged 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 with

maturities of less than two years in June 2012. The threshold was later reduced to one

year in December of the same year.

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

13 March 2014


Taxation of short positions in financial derivatives: In July 2011, the IOF was

imposed at the rate of 1% on increases in short positions in financial derivatives whose

settlement value is influenced by movements in the FX rate (e.g., USD options, futures,

and forward-rate agreements (FRAs). The 1% IOF was also levied on domestic

investors to prevent increases in short dollar positions. Specifically, a new acquisition or

sale of an exchange derivative resulting in an increase in short position or decrease in

long 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 government’s intervention measures aimed at controlling FX rates, still in place

as 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 currency

made with debit cards, on foreign currency withdrawals abroad, on purchases of

travelers checks, and on the addition of foreign currency to prepaid cards.

13 March 2014


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%.

OCTOBER

04: 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 to other 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-1 capital. Reserves are deposited with central bank in local currency and will not be remunerated.

10: Brazil’s Sovereign Fund permitted by its bylaws to deal in the FX market.

13: Resumption of central bank’s 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 transactions 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 of transactions in derivatives market.

DECEMBER

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

MARCH

01: 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 from 1% 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 travelers checks, 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.

13 March 2014


4. Interest Rates Interest rates in Brazil (for example, the Selic basic interest rate and the Certificate of

Interbank Deposit (CDI) rate) are expressed mainly in compound annualized terms, based

on a year of 252 business days. They differ from the US standard compounding method,

which 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 Rate

The Special Settlement and Custody System (Selic) is an electronic system run by the

central bank for registration, settlement, and custody of transactions involving public

securities. All Selic transactions are settled immediately; debits and credits are made

directly to each institution’s reserves account at the central bank.

The Selic rate is the average of rates for one-day financing transactions backed by

federal 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 rate

reflect the liquidity conditions in the bank reserves market. These interest rates are not

influenced by counterparty risk in the buyback transactions since all trades are backed

by 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 meetings

held each year. The Copom defines not only the target for the Selic rate but also the

Committee’s “bias.” If a negative or positive bias is adopted, the central bank governor can

alter the Selic rate target at any time between Copom meetings, provided this change

follows the direction of the announced bias. Using a bias has become unnecessary in

recent years, however, as inflation and volatility have both decreased significantly. The

bias has been neutral since March 2003.

The establishment of the target induces banks operating in the Selic system to carry out

one-day buyback transactions around the target, since the daily activity of the central bank

tends to offset surpluses or shortfalls in bank reserves, bringing the target close to the rate

effectively negotiated.

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

13 March 2014


4.2. CDI Rate

The CDI rate is the average rate of one-day transactions backed by fixed-rate Certificates

of Interbank Deposit (CDIs), registered and settled by the Cetip clearinghouse (Appendix

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

financial groups.

The majority of CDI trades are made for a period of one day (overnight) and are referred to

as “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 of

the CDI to the purchasing institution and creates a credit that impacts the selling

institution’s 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 the

previously 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 transactions

recorded 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 the

computation.

Exhibit 7: CDI Settlement

CDI

T+1 End of T+1

Interest$ +

Bu

yer

Seller

$ CDI

$

T End of T

$ + Interest

CDI

CDI


Even though the central bank does not operate directly in this market, the CDI rate tends

to 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

Source: Central Bank of Brazil, Credit Suisse

13 March 2014


4.3. Basic Financial Rate

The basic financial rate (TBF) was created to be used as a benchmark rate for

transactions within the financial system with maturities above 60 days. The TBF rate is the

average of rates paid on Certificates of Deposit (CDBs) and/or Non-Transferable

Certificates of Deposit (RDBs)9 with maturities of 30 to 35 days. These transactions are

weighted 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 the

weighted average, the two highest and the two lowest rates surveyed and the securities

purchased by institutions from the same conglomerate are removed from the sample. The

TBF rate is used mainly as the basis for calculating the Reference Rate (TR).

4.4. Reference Rate

The Reference Rate of Interest (TR) was created in 1991 as a reference rate for future

inflation built into nominal market interest rates. The idea behind the TR is to strip out the

expected real interest rate from the nominal interest rate represented by the TBF. The

difference 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 CDB

and RDB rates), to which a reduction factor is applied. The TR reduction factor is a

function of the TBF, and the parameters of its formula are periodically updated by the

central bank (Exhibit 9).

Exhibit 9: Formulas for Calculation of TR

TR = - 1R

1 + TBF

Where:

R = TR reduction factor

TBF = Basic Financial Rate on the

reference day

B = function of the TBF rate

TBF (% p.a.) B*

TBF > 16 0.48

15 < TBF ≤ 16 0.44

14 < TBF ≤ 15 0.40

13 < 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 by

Central Bank Resolutions 3446 and 3356/07.


The TR rate is mainly used as the basic rate for the Brazilian savings and loan system,

which finances housing construction. Yields on savings deposits are split into two

components:

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.

9 Please refer to section 7.1.

13 March 2014


Until May 2012, the additional remuneration was 0.5% p.m., regardless of the Selic rate.

The change to the taxation rules governing returns on savings deposit accounts occurred

to prevent funds from migrating from government bonds and other securities indexed to

the Selic rate to savings deposits (the Monetary Policy Committee (Copom) set the Selic

rate 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, mainly

because the investments are exempt from income tax, which varies between 15.0% and

22.5% for most types of investment (Exhibit 10).

Exhibit 10: Passbook Savings and DI Over Rates

% p.a.

CDI rate

Savings yield

5

10

15

20

25

30

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


4.5. Long-Term Interest Rate

The 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 for

long-term credit in the country. At present, the TJLP is the main rate for credit lines from

the 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 that

rarely occurs.

The Long-Term Interest Rate is effective for a calendar quarter and is calculated based on

the following parameters:

(i) the inflation target, prorated for 12 months as of the first month in which the rate is

effective, based on the annual targets set by the Brazilian Monetary Council

(CMN); and

(ii) the risk premium, which embeds an international real interest rate and a component

reflecting Brazil’s 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 immediately

preceding the date on which it is to take effect (Exhibit 11).

10

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

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


13 March 2014


5. Inflation Indexes There are several price indexes in Brazil, mainly due to the country’s history of high

inflation. We discuss all of these indexes at length in our “Inflation Guide: Inflation indexes

in 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 regime.

Another factor that heightened the importance of the IPCA versus other indexes was the

growth in government bonds linked to the IPCA (NTN-Bs), compared to growth in the

market 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 price

indexes, in particular the General Price Indexes (IGPs) and the CPI put out by the Institute

of Economic Research Foundation (Fipe). These indexes differ in their underlying baskets

of goods and services, household target as a function of income brackets, and

geographical locations. In the case of the IGPs, producer inflation has higher weight in the

index than consumer inflation.

5.1. IBGE Indexes

The Brazilian Statistics Bureau (IBGE) publishes three important inflation indexes each

month: IPCA, IPCA-15, and INPC. The indexes follow the same method of calculation but

differ in terms of the data collection period and the composition of the basket of products

and services.

IPCA

The IPCA reflects prices on a nationwide basis (data collected in nine major metropolitan

areas, plus the cities of Goiânia and Brasília), for goods and services used by households

with monthly income between 1 and 40 times the monthly minimum wage11

. The change in

the index is calculated on the basis of the weighted arithmetic average of the price groups,

and the weighting is variable according to past inflation.

The most frequently analyzed breakdown of the IPCA is between market prices and

administered prices. Around 25% of the IPCA is composed of goods and services whose

prices are administered directly or indirectly by the government; the remainder is

represented by market prices. Recent inflation analyses have also made the distinction

between 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 difference

is 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 the

IPCA is collected from the first through the last day of the month (Exhibit 12). Given that

the IPCA-15 is released before the IPCA, it has become a good method for determining

the trend of the IPCA.

11

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

13 March 2014


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

IPCA (Broad Consumer Price Index)

From the 1st to the 30th day of the reference month

of the following month

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

From the 16th day of the month before the reference month to the 15th day of the reference month

of the reference month

Survey

period

Approximate

monthly

release date

Index

Source: Brazilian Statistics Bureau (IBGE), Credit Suisse

5.2. FGV Indexes

The General Price Indexes (IGPs) are published by the Getúlio Vargas Foundation (FGV).

They combine prices surveyed in various production chains, ranging from basic

agricultural 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 National

Construction Cost Index (INCC, Exhibit 13).

Exhibit 13: Composition of General Price Indexes

% of total

INCC

Represents the value added by the construction

industry to GDE

Represents the value added by the retail sector and consumer services

to gross domestic expenditure (GDE)

CPI

60%

30%

10%

PPI

Represents the value added by production, transportation, and wholesale trade to

GDE

Source: Getúlio Vargas Foundation (FGV), Credit Suisse

The FGV releases three general price indexes during the month: IGP-10, IGP-M, and IGP-

DI, which use the same calculation methodology and differ only in their collection period

(Exhibit 14).

13 March 2014


Exhibit 14: Survey Periods and Publication of IGPs

IGP-10

From the 11th day of the month before the reference month to the 10th day of the

reference month


IGP-M

From the 21st day of the month before the reference month to the 20th day of

the reference month


Survey

period

Approximate

monthly

release 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 the

end 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 days,

called “previews.” The announcement of the partial results for the 10- and 20-day periods

enables analysts to anticipate changes in the overall IGP-M index. The IGP-M previews

measure 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


13 March 2014


6. Brazil’s Public-Sector Debt

6.1. Overview

The improvement in solvency indicators and the active role of the Brazilian Treasury have

contributed 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 total

debt;

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 33.737.9 38.3 41.2 43.3

5.9

7.012.5

13.5

14.9

15.5

22.526.3

29.3 28.628.1 29.6

35.536.1

57.0

56.662.9

63.2

59.953.9

40.035.5 37.4 37.0 33.4 31.5

22.8 20.022.328.6

22.4

10.85.2 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 that

is directly exposed to exchange rate fluctuations and monetary policy cycles. In addition to

the 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 maturing

in the next 12 months and an increase mainly in the stock of debt maturing within three

years (Exhibit 18). From 2011 to 2013, however, the stock of debt maturing within one

year increased slightly, while the stock of debt maturing in one to three years declined.

This movement is explained by the Treasury’s more aggressive policy of swapping Selic-

linked securities for fixed-rate securities, which typically have shorter maturities.

12

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

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

13 March 2014


Exhibit 17: Average Time to Maturity and Duration of 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 to

1 year

1 to 3

years

More

than 3

years

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

Brazil’s 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 debt

bond issuances as a source of funding, but rather for operational purposes. According to

the Treasury, the main aim of the new external debt issuances is to build a sovereign yield

curve in the international market in both USD and BRL, to serve as a benchmark for

private-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 45.744.2


6.2. Domestic Public Securities

Since 2002, the Brazilian Treasury has been the only entity responsible for issuances of

public debt, both domestic and external. In the past, the central bank was responsible for

the issuance of external debt and shared the responsibility for domestic debt issuances

with the Treasury. Since then, the central bank has been responsible only for repo

operations, by managing a stock of securities originally issued by the Treasury. Currently,

the Treasury issues fixed-rate bonds with maturities of up to 20 years and inflation-linked

securities for up to 40 years (Exhibit 20). In the external market, the Treasury has already

issued fixed-rate securities in BRL maturing within 35 years (maturity in 2045).

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 semesterCoupon 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 Treasury’s primary issuances are made via public auctions. At the end of

each month, the Treasury publishes a timetable with the dates of the auctions for the

following month as well as the total maturities and the maximum volume of securities that

will 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 Information

System (SISBACEN, Appendix A). Settlement is on the day after the effective date of the

operation (T+1).

The terms of the auctions depend on the type of securities offered. IPCA-Linked National

Treasury Bills (NTN-Bs) and Selic Floater Treasury Bills (LFTs) are sold through a

uniform-price auction, with a single sale price (or cutoff price). The other securities are

sold in multiple-price auctions14

(also known as discriminatory auctions), with payment

based on the offered bid. Settlement takes place on the following business day and can be

made in cash or in other securities, according to the features of the securities being traded.

The Treasury follows a relatively stable timetable of primary issuances, with regular

auctions on Tuesdays, Wednesdays, and Thursdays, depending on the type of security

offered15

(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

WeekdayTuesday

(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


14

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

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

13 March 2014


In addition to the auctions described above, the Treasury also holds other kinds of auctions

aiming to spread out maturities, lengthen tenors, change compositions, and stimulate

secondary market liquidity. In exchange auctions, for example, the Treasury receives only

other public securities as payment for the issuance, and in buyback auctions the Treasury

repurchases 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 and

traded 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

2.92.3 1.7 1.4 1.2 1.0

1.63.00.1

1.3

1.3

1.1

0.8 1.61.1

0.8

1.0

1.8

0.1

0.3

0.4

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


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)

ΔSELIC: 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

UPUNV

( ) 2521bd

YTM+=

1-=

252

bd

YTMUP

UNVUNV

UPQuote =

ΔSELICNVUNV •=Δ SELIC is the BZSELCA

Index on Bloomberg

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

6.87.1

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


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 2013

730 626 6811121 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


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


22.8

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% 2

1

+( ) 2521+YTM

bdi

CouponUP=

n

i=1

NV

( ) 2521+YTMbdn

Liquidity / Daily Average (BRL mn)

31 208 23534

296 428132

26 513

203

143

1778

123 12

408175

15042

1

2007 2008 2009 2010 2011 2012 2013

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


13 March 2014


6.3. Secondary Market

Despite the sizable stock of domestic debt, the liquidity of the secondary market is low.

From 2009 to 2013, there was an increase in total liquidity, reversing the downward trend

observed from 2004 to 2008 (Exhibit 23). The recent increase was due to the growth in

trading 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

1.2

6.7 6.2 4.4 3.72.5

3.1

3.4 3.03.9

7.2

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

4.1

8.27.6

6.3 5.9

4.75.7

7.7 7.5

9.3

20.2

NTN-C

NTN-B


The increase in volume was concentrated in securities with longer maturities. Part was

driven by Provisional Decree 28116, published in February 2006, which exempted non-

resident investors from paying income tax on the purchase of public securities. The

measure affected mainly securities with longer maturities, especially above two years

(Exhibit 24). The government made investments in fixed income securities by non-

residents 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 fixed-

income portfolio inflows was once again reduced to zero.

Exhibit 24: Average Daily Trading Volume and Share of Securities Maturing in More 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 1.41.0 1.1 0.8 0.51.1

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

33.029.1

50.0

58.1 59.358.6

Source: Credit Suisse, Central Bank of Brazil

16

Converted into Law No. 11312 in June 2006.

13 March 2014


As an alternative to the daily average, another measure of liquidity in the secondary

market is turnover, defined as the ratio between the total value traded in the past 12

months and the current debt stock. According to this criteria, there was also a sharp

increase 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 of

these 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 turnover

of NTN-Bs, in particular, has recovered since 2010, after a decrease between 2006

and 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

13 March 2014


7. Private-Sector Securities The market of private fixed-income bonds has grown at a very strong pace in recent years,

benefiting not only from the country’s 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), private

securities debt (debentures/corporate bonds), Banking Credit Notes (CCBs), Certificates

of Real Estate Receivables (CRIs), and Receivables-Backed Investment Funds (FIDC).

The most significant are CDBs/RDBs and corporate bonds (Exhibit 26), even though the

stock of the other securities—especially CCBs, CRIs (Exhibit 27), and FIDCs—has been

growing 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 8

5

155 2

10 248

283 338 3

97

505

585

152

126

283 329 362

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

0.7 1.7 2.9

6.7

12.9

20.5

18.4

18.2

22.5 24

.7 26.7

0.6

0.9 2.1

2.2 2.9

7.2

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 RDBs

Certificates of Deposit (CDBs) and Non-Transferable Certificates of Deposit (RDBs)

are private securities issued by financial institutions (commercial, development,

investment, and full-service banks) with the aim of raising funds in the market for

financing commercial credit operations, with negotiated rates and maturities. CDBs

represent the vast majority of these two securities in the market (99%), especially

since 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 low

stock of RDBs vis-à-vis CDBs (Exhibits 28 and 29).

13 March 2014


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 December

2013), while fixed-rate securities represent only 5% of the total (Exhibit 30). The

composition of the stock of these securities has remained roughly constant in recent years.

The 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

8 143

262308 340

654739 763

665584

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

599

547

362329

283

127152

Source: Cetip, Credit Suisse

Trading in CDBs is done mainly on the over-the-counter (OTC) market and registered with

the 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 average

volume 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.

13 March 2014


Exhibit 31: Daily Trading Volume of CDBs in Secondary Market

BRL mn and % of total outstanding volume

61

169

259

280

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


7.2. Corporate Bonds

Corporate debt bonds (locally referred to as debentures) are generally issued by large

companies whose aim is to raise longer-term funds to finance projects and/or adjustments

in their capital structure. These bonds can be issued only by companies formed as publicly

or privately held joint stock corporations. However, only publicly traded companies can

make issuances for general investors (public issuances), while unlisted companies can

only 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 FX

or inflation indexes (especially the IGP-M). In general, corporate bonds pay a risk premium

in the form of a fixed spread or a percentage over the CDI interest rate, which reflects

companies’ risk classification. Debenture contracts include special clauses that define

types of guarantee, possibilities of repricing debts17

, convertibility into shares, early

redemption, etc. The bonds may be issued without a fixed period for the redemption of the

principal amount (perpetual bonds).

The stock of corporate debt bonds in the domestic market has augmented significantly

since 2005, but the composition of this expansion has changed greatly. In early 2009, the

Brazilian Securities Commission (CVM) implemented rules for a new type of public offering

of private securities such as non-convertible corporate bonds, commercial paper, and

CCBs. These offerings are referred to as restricted efforts distributions (per CVM Directive

476 (“ICVM 476”)), involve less paperwork, and can be made only to qualified investors.

Issuances under this regulation do not need to be registered with the CVM until the end of

the distribution process. Accordingly, the offering process has become much faster and

should 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 90

days after the initial purchase.

17

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

13 March 2014


Exhibit 32: Issuances of Corporate Bonds

BRL bn

15 15 510

42

69

4840

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 book-

entry bonds, linked to the DI interest rate and not convertible into shares of the issuing

company, 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 of creditors

1.3

91.4

5.6

0.7 1.10.2

1.0

DI IPCA IGP-M TR USD Other

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

13 March 2014


Trading in the secondary market is carried out on the trading floor or on an OTC market, by

institutions authorized to operate by the central bank and by the CVM. The National

Debenture System (SND), an entity run by Cetip based on the policies and directives

established by the Brazilian Association of Financial Market Institutions (Andima, Appendix

A), concentrates practically the entire volume of these securities traded in the secondary

market. The BM&FBovespa stock exchange also has systems dedicated to the trading of

fixed-income bonds in general, including corporate bonds, namely BovespaFix (an electronic

system run by orders) and SomaFix (OTC market). Investors interested in buying corporate

bonds 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 in

research, development, and innovation, at the end of 2010 the government created

various incentives for private investments in such areas. Such incentives, later

consolidated under Law No. 12431/2011 of June 2011, include a reduction in the rates of

the Income Tax (IR) applicable to earnings of individuals, legal entities, and foreign

investors originating from bonds issued by Specific-Purpose Entities (SPEs) formed to

implement such projects (Law No. 12431/2011) . Income tax payable by individuals and

foreign 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’ cost

of funding for these bonds. For those who buy the bonds, the initiatives expand

guarantees and reduce investment risk. According to the new rules, the bond issuances

may, at the discretion of the BNDES, share guarantees with potential loans taken out by

the bank for the same project. Another change is the inclusion of a “cross-default” clause

regarding loan agreements and potential public issuances for the same infrastructure

project. In other words, if the company defaults on the bond payment it will be blocked

from taking out additional loans from the bank. According to the clause, the BNDES can

declare early maturity of a loan if there is any type of nonperformance in connection with

the bonds. Accordingly, the clause increases the security of the market participants owing

to 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 or

cooperatives 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 CPR

establishes the quantity, place, and date of product delivery. The terms of the contract

may be amended by mutual agreement between parties.

Financial CPR: Settlement occurs via transfer of funds from the issuer to the buyer on

the security’s maturity date. The settlement amount depends on the specifications

established in the contract. In general, CPRs consider the selling price of the agricultural

product 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 future

commodity prices or a futures exchange, especially the BM&FBovespa.

The law allows CPRs to have various types of guarantees. The most common are

fiduciary alienation and pledge of crops, herds, and/or agricultural implements and

equipment. Some CPRs are secured by bank bonds or insurance policies. Due to the high

cost 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 custodial

institution, especially the Cetip clearinghouse. CPRs are registered according to the

physical volume of the product they refer to, but they do not state the financial value of the

13 March 2014


transaction. The liquidity of CPRs in the secondary market is very low, with many days

lapse without any activity. Additionally, average maturities are short, as these securities

are 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 to

the sale of new properties, see Exhibit 34). However, the broad definition of the real estate

rights that serve as collateral enables the CRIs to be used not only to implement new real

estate projects, but also to deploy companies’ capital and enable the disbursement of

funds for investment activities.

Exhibit 34: Flowchart of Issuance of CRIs

Collecting

bank

Contract

$

CRI

$Property sold

Contract

$

Payment of

installments

$

$

Amortization and

Interest

1 2 3

4

Securitization

companyInvestorsBuyer

Real estate

developer


Although CRIs were implemented in 1997 (Law 9154), only recently have they started to

contribute more significantly to growth in home loans18

and—like corporate bonds—see a

boost 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 2.33.7 3.2

1.7

0.9

5.5

9.5

6.9

8.1

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


18

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

13 March 2014


The increase in the volume of CRIs in the last decade has been fostered by the more

favorable macroeconomic scenario, declining real rates, the expansion of home loans and

certain legal and tax changes, especially:

Creation of pool of assets available as security for debts or obligations: Since

2004, each real estate project must have its own capital and separate accounting

from 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 project.

Thus, a CRI investor is not exposed to the risk of potential liabilities of the real

estate 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 original

borrower, whose flow of payments will be applied toward settlement of the security.

Fiduciary alienation (alienação fiduciária): This institution governs the transfer of

ownership 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 of

the loan is interrupted, the lender can recover full ownership and possession of the

property without filing suit. Fiduciary alienation for home loans does away with the need

to collect overdue debts in court, enabling extrajudicial enforcement of the guarantee.

Income tax exemption: Since January 2005, individuals are exempt from income tax

on net gains earned on CRIs as well as Real Estate Bills (LHs), and Real Estate

Credit Notes (CCIMs). Corporate and institutional investors are not exempt from

income tax.

In December 2010, the Ministry of Finance announced a package of measures to

stimulate private long-term credit. It exempts foreign investors from income tax on

earnings on CRIs that fulfill certain requirements (e.g., average term greater than four

years, impossibility of early redemption, and link to a government-approved

infrastructure investment project). The government also allowed CRIs to be booked

according to the rules for the allocation of savings deposits.

The new legislation led to a significant reduction in costs and, especially, in the

average time for recovery of properties in connection with non-performing loans. There

are no official statistics on the average recovery time for properties, but some issuers

suggest it is nearly six months (Exhibit 36).

13 March 2014


Exhibit 36: Timetable for Recovery of Real Estate

T+15

Second telephone call to verify whether the problem persists and the borrower intends to make payment. Verification of receipt of the collection letter and possibility of renegotiation. Payment deadline is T+30.

T+30

Third phone call to make the borrower aware that if payment is not made within ten days, an official 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 and demanding payment within 20 days.

T+80

Letter sent to the appropriate Real Estate Registry Office to officially report the arrearage and other costs. A 15-day period is granted for the borrower to settle the arrears at the Real Estate Registry Office.

T+83

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

T+98

After payment of the Municipal Tax on Property Transfers (ITBI), ownership of the property is vested 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 property’s 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 plus charges 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 plus expenses and charges).

T+148

If the property is sold, the difference between the amount obtained at the auction and the debt plus 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 the securitization 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

13 March 2014


Box 1: Certificate of Additional Construction Potential

The Certificate of Additional Construction Potential (Cepac) is a security subject to CVM

regulation, 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 urban

infrastructure works in certain areas. The municipal government defines, for a specific

region of the city, a list of projects for urban improvement (e.g., construction of overpasses

and squares) that ultimately tend to increase the value of the properties in those regions.

During execution of the listed projects, the municipal government auctions the Cepacs to

fund part of the construction. Then, Cepac buyers become entitled to perform construction

beyond 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 be

transferred to constructions on plots of land belonging to other regions of the city. These

securities may be traded on the secondary market and ownership does not require the

buyer 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 where

public projects will be executed. In addition to the risk of prices in areas benefited by public

works not appreciating, one of the main risks associated with Cepacs is the risk of

significant changes in the master plan, for instance if the municipal government increases

the maximum permitted height of buildings, which reduces the value of the additional

construction rights.

As of September 2007, two urban operations had been registered with the Brazilian

Securities and Exchange Commission (CVM), both by the City of São Paulo: Água

Espraiada and Faria Lima. The first Cepac was issued in July 2004 via an auction held on

the over-the-counter market (Soma) of the São Paulo Stock Exchange (Bovespa), totaling

BRL 30mn allocated to the construction of a bridge within the Água Espraiada operation.

Since then, more than BRL 609mn has been issued to finance this project, out of total

potential funding of BRL 1.1bn until 2019 (54% of total). The Faria Lima operation raised

BRL 701mn of total potential funding of BRL 715mn (98%).

By the end of 2010, another Cepac had been registered with the CVM, with the objective

of improving urban development in the neighborhoods around the Rio de Janeiro harbor,

aiming to attract more residents and commerce to the area. The reurbanization project

includes the construction of tunnels and avenues, improvement of urban transportation,

and power, sewage, and telephone networks; a total of BRL 2.6bn in potential funding was

issued through Cepacs.

13 March 2014


7.5. Banking Credit Notes (CCBs)

CCBS are used to generate negotiable receivables. These notes are issued by an

individual or legal entity to a financial institution and represent an exigible debt, payable in

cash, in connection with any type of credit operation.

One of the main advantages of a CCB is that it is a legal document valid for initiating

enforcement proceedings, i.e., a CCB does not require fact-finding19 for enforcement,

which speeds up the legal proceedings and reduces the costs of collecting debts in court.

The amount due is determined unilaterally by the creditor, based on the terms of the bond.

Thus, the CCBs substitute other types of receivables (e.g., promissory notes), with

significant advantages for the creditors. With the CCB, a creditor financial institution may

collect the debt, moving directly to the phase of guarantee enforcement, reducing recovery

time and facilitating the sale of the loan to a third party20

. The return on CCBs is generally

a percentage of the DI rate, in accordance with the maturity of the bond. CCBs traded in

the secondary market are originated mainly by small and medium-size banks.

7.6. Receivables-Backed Investment Funds (FIDCs)

FIDCs invest at least 50% of their net asset value (NAV) in credit receivables stemming

from operations carried out in the financial, commercial, industrial, real estate, mortgage,

leasing, and service industries. In general, an FIDC acquires receivables originated

through various credit operations and sells them to investors in the form of shares in the

fund (Exhibit 37).

Exhibit 37: Flowchart of an FIDC Generated in a Commercial or Industrial Operation

Collecting

bank

$

Payment of

installments

$

$

Amortization and

Interest

4

Receivables

$

Units (shares)

$Products

Contract

Services

1 2 3

FDIC InvestorsBuyer Assignor


FIDCs are regulated by the CVM and do not have their own corporate identity. Thus, the

funds cannot issue debt and the entire NAV belongs to the shareholders.

FIDCs can be open or closed, like other funds:

Open: Shareholders can redeem shares at any time, subject to the minimum holding

period established in the fund’s bylaws; and

Closed: Shares can be redeemed only after the fund’s expiration or liquidation. The

shares can also be amortized during the life of the fund in accordance with the fund

bylaws or by a decision of the shareholders at a meeting.

19

Since fact-finding is not required, the creditor can collect the overdue debt in significantly less time. 20

Issuing a CCB makes it more difficult for the borrower to legally challenge the terms of the initial credit transaction.

13 March 2014


In terms of classes, shares of FIDCs can be classified as:

Senior: Holders of this class of shares enjoy priority in amortization or redemption of

investments; and

Junior: Junior shares are subordinate to senior shares for amortization and redemption

purposes. Holders of junior shares receive the redemption or amortization of their shares

after the payment to all senior shareholders.

In other words, the fund’s entire return must be used, initially, to ensure payment to the

fund’s senior shareholders. The price of a senior share is calculated as the lesser of the:

Total net NAV of the fund divided by the total number of senior shares; and

The price of the share on the previous day adjusted for the stipulated benchmark21.

The price of junior shares is calculated as net equity minus the portion relative to the total

amount of the senior shares and divided by the total number of junior shares. In other

words, the junior shareholders are only remunerated when the leftover net NAV, after

meeting the obligations to senior shareholders, is positive.

Vsub = Value of junior shares

Nsen = Number of senior shares

Vsen = Value of senior sharesNsub

NetEquity - Nsen Vsen=Vsub

If the return of the fund is below the established target (generally defined as a proportion

of the DI rate or return above an inflation index), the senior shareholders will have a higher

return ensured by the use of the funds injected by the junior shareholders. Accordingly,

senior shareholders are less exposed to risk, and thus have a lower expected return than

junior shareholders.

The first FIDC was created in September 2002 and was backed by credit receivables

resulting from payroll loans to public employees. After rising steadily until 2006, the

volume of FIDC issuances has dropped since 2010 due to tightening by the CVM and the

central bank. (Exhibit 38).

There are four categories of FIDCs, depending on the type of receivables in their portfolio:

Factoring: Funds that invest in diversified receivables, such as promissory notes, trade

bills, and checks from factoring companies and credit unions.

Financial: FIDCs whose portfolios include real estate, payroll loans, personal loans, or

auto loans.

Agriculture, industry, and commerce: Comprised of receivables from the infrastructure,

commercial receivables, corporate credit, and agribusiness sectors.

Other: Funds that invest in non-performing loans and government receivables.

Currently, the bulk of FIDCs are backed by receivables from agriculture, industry and

commerce, followed by FIDCs backed by financial receivables (Exhibit 39). Since they are

easily implemented, FIDCs should establish themselves as a financing alternative for

medium and large companies.

21

The benchmark is not a promise or guarantee of profitability of the fund, but only a parameter to define how much of the fund’s net NAV will be allocated to the senior shareholders upon amortization or redemption.

13 March 2014


Exhibit 38: Volume of FIDCs Issued Exhibit 39: Profile of Stock of FIDCs by Type of Underlying Receivable

BRL bn % of total

0.2

1.5

5.1

8.8

14.3

12.112.9

9.2

12.3

7.6

4.9

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Finance

27%

Factoring

6%

Agroindustryand trade

51%

Other16%

Source: Brazilian Securities Commission (CVM), Credit Suisse Source: Brazilian Securities Commission (CVM), Credit Suisse

FIDC shares are registered with clearinghouses for trading in the secondary market.

Despite the strong growth in the total stock, the trading volume in the secondary market is

still very low.

7.7. Judicial Requisitions to Treasury for Budget Appropriation and Payment of Money Judgments (Precatórios)

Precatórios are requests by courts to treasuries for budget appropriation and payment of

final and unappealable money judgments rendered against the federal government, Federal

District, states, or municipalities. Since governments can disburse only budget-appropriated

funds, public entities are not required to immediately pay judgments rendered against them.

From a legal standpoint, these requisitions are classified as compensation for loss of

income (alimentares) and compensation for other losses (não alimentares) according to

the nature of the debt that gave rise to the order.

Alimentares: Credits resulting from salaries, compensation, proceeds, pension benefits,

social security benefits and reimbursement to individuals for injury, pain and suffering,

death, or disability; and

Não alimentares: All other credits, especially for property damages, expropriations, and

contractual indemnity.

Theoretically, requisitions classified as alimentares have priority, while não alimentares

are paid by order of issuance. However, payment of não alimentares is actually faster due

to a different legal provision. According to Brazil’s Constitution, não alimentares

requisitions can be made in up to ten annual installments, and in the event of default on

any installment a court can order the seizure of funds of the judgment debtor (federal

government, Federal District, state, or municipality) to settle the obligation; this provision

does not apply to alimentares requisitions.

Official data on public debt released by the central bank do not account for the volume of

these requisitions as debt22

. Therefore, from the perspective of investors and the CVM,

these requisitions are not classified as government debt bonds but rather accounts

receivable—since they represent a future payment obligation—and can therefore be

included in FIDC portfolios.

22

However, requisitions issued and outstanding after May 2000 are considered debt for purposes of the limits established in the Fiscal Responsibility Act.

13 March 2014


The Constitution states that the judgment debt will accrue adjustment for inflation and

interest at the legal rate. However, it does not specify which inflation index is to be used

for monetary adjustment purposes or which interest rate. For requisitions for payment of

judgments rendered against the federal government, courts have used the IPCA-E23

as

the monetary adjustment index and considered the legal rate of interest as 6% per year24

.

The absence of a clear definition of these parameters for monetary adjustment of the real

value of these requisitions for payment of judgments poses an additional risk for investors.

The volume of requisitions for payments of judgments against states and municipalities

comfortably surpasses the federal government volume. The market has a greater demand

for federal precatórios mainly due to the regularity of payments in recent years. Many

states and municipalities do not have a regular schedule for payment of precatórios, which

has resulted in a number of legal actions against state treasuries for non-performance of

obligations established by the courts25

. In an attempt to solve this problem, a bill for

constitutional amendment (PEC) is in progress at the Senate (PEC No. 12), seeking

clearer rules for the payment of state and municipal precatórios.

7.8. Treasury Bills (LFs)

LFs are a relatively new instrument for financial institutions, and work as a bond for those

entities, as they are not allowed to issue debentures. The Brazilian Monetary Council (CMN)

(Appendix A) introduced regulations on the issuance of these securities in February 2010,

determining that LFs must have a time to maturity of at least two years and a minimum unit

price of BRL 300,000. Thus, LFs have become a suitable alternative for banks’ long-term

funding needs, which used to be met mainly via issuance of international bonds. Accordingly,

LFs make funding less vulnerable to external fluctuations. Issuances have been substantial,

reaching a total outstanding volume of BRL 189.3bn as of the end of May 2013 (Exhibit 40).

Exhibit 40: Stock of LFs Registered with Cetip

BRL bn

210217

211208205

198193

189186

181175174

171172168164160156

151145143

138130

Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13


The return on LFs can be linked to the DI rate, to inflation, or even to fixed-rate yields, but,

as with corporate bonds, nearly 100% of LFs pay a spread over the DI rate. LFs can also

be traded in the secondary market (Cetip). Similarly to corporate bonds and Banking

Credit Notes (CCBs), the liquidity of this security is still very low.

23

The IPCA-E is released quarterly (in March, June, September, and December) and is calculated as the cumulative IPCA-15 result for each quarter.

24 In some cases, courts have also ordered the payment of compensatory interest in addition to legal interest of 6% p.a., especially for alimentares requisitions.

25 Theoretically, non-payment of these requisitions can result in intervention in state governments, but this has never occurred.

13 March 2014


Exhibit 41: Features of Treasury Bills

Trading Unit

USD 50,000.00Maturity

Contract matures on the first trading day of the month of maturity of the contract.

BRL 0.001 per USD 1,000.00

Minimum Variation

Call or Put Options of BRL/USD Futures Contracts

Margin Deposits (Required Only of Seller)

The required margins are announced daily by the BM&F. The following assets are accepted as margin deposits: cash, gold, fixed-income fund shares, or—at the BM&F’s discretion—public and private debt securities, letters of guarantee, insurance policies, equity interests, and shares of closed equity investment funds*.

* For foreign investors, the BM&FBovespa also accepts a margin deposit in dollars or bonds of the US government (T-Bonds,

T-Notes and T-Bills). The margin must be deposited into the accounts of the BM&FBovespa with the settling bank in the US.

Transaction Costs

Processing fee calculated based on value of the operation (settlement amount)

Standard transaction: 0.4%

Exercise and day trade: 0.2%

Settlement fees: 0.2% of the strike price (0.1% for combined operations)

BM&F fees: 6.32% of the basic processing fee

Transaction costs are payable on business day after day on which transaction is carried out on trading

floor.

The effective partners of the BM&F will pay, at most, 75% of basic processing fee and 75% of other

transaction costs.

Institutional investors pay 75% of the BM&F fees.

Premium of the option, in BRL per USD1,000.00, with up to three decimal points

Price Maximum Daily Variation

No limits

Strike Prices

Set and announced by the BM&F, expressedin BRL per USD 1,000.00

Last Trading Day

Last Trading Day of the month prior to the month of maturity of the contract.

Features of Treasury Bills

Can be issued by full-service banks, commercial banks, investment banks, financial companies (SCFIs), savings and loan associations, and real estate financing companies

Remuneration: fixed interest rates, combined or not with floating rates or price indexes

Minimum time to maturity: 24 months; total or partial redemption before maturity is prohibited

Can be repurchased by issuing financial institutions in an amount not to exceed 5% of total issued

Must have a unit face value greater than or equal to BRL 300,000

Earnings paid in intervals of 180 days or more

Source: BM&FBovespa, Credit Suisse

13 March 2014


8. Derivatives and Swaps The Brazilian derivatives market is concentrated in the BM&FBovespa (Appendix A),

where future contracts of interest rates, dollar (spot and future), stock market indices

(e.g., Ibovespa) and several commodities, especially agricultural and gold, are

traded (Exhibit 42).

Swaps are directly traded between the parties (OTC market) and may be registered both

on the BM&FBovespa and on the Cetip (Appendix A). Most swap agreements are

registered on the second of those institutions, especially due to the lower operational cost

(Exhibit 43). In general, contracts registered on the BM&FBovespa involve guarantees

from one of the parties.

Exhibit 42: Breakdown of future contracts’ daily volume traded on the BM&FBovespa

Exhibit 43: Total average daily volume of swap contracts on Cetip and BM&FBovespa

BRL mn BRL bn

18 21

3743

57

77

57 55

106114

122

178

9 10 14 1623

33 31 27 29 30 33 36

Interest rates futures

FX futures

2004 2012201120102009200820072006200520032002 2013

0.71.0

0.60.3

0.60.4 0.4

0.20.4 0.4 0.4 0.3

1.8

1.4 1.41.7

2.0 2.0

3.5

1.3 1.3

2.2

2.7

4.8

BM&F

Cetip

201320122011201020092008200720062005200420032002

Source: BM&FBovespa, Credit Suisse Source: Cetip, BM&FBovespa, Credit Suisse

8.1 Futures and Options

8.1.1. Interest rate contracts (PRE-CDI)

The variable traded is the effective interest rate on inter-bank deposits, defined as the

accrued total DI interest rate (calculated by the Cetip) for the period between the start of

the trade date and the last day of contract trading (Exhibit 44). The BM&FBovespa always

maintains open contracts for the four months following the current month and for the first

month of each quarter (January, April, July and October). In general, contracts maturing in

January of each year have the greatest liquidity.

13 March 2014


Exhibit 44: Main characteristics of future interest rate contract of BM&FBovespa

The required margins are announced daily by the BM&F. The following assets are accepted as margin deposits: cash, gold, fixed income funds shares, and—at the BM&F’s discretion—public and private debt securities, letters of guarantee, insurance policies, equity interests, and shares in closed equity investment funds*.

Maximum variation of 2.0pp in relation to the closing rate of the last trading session. The exchange may alter the price fluctuation limit applicable to any contract month at any time, even during a trading session, upon 30 minutes notice to the market.

Always in the four months after the trading date and, thereafter, in the first month of each quarter.The contracts always mature on the 1st business day of the month of maturity.

Basic processing fee is calculated as a percentage of the difference between BRL 100,000 and the

closing price (PU) of the previous day adjusted by the CDI rate:


Day trade: 1.5%

Settlement fee: Value of the basic processing fee on the Last Trading Day


Transaction costs are payable on business day after the day on which transaction is carried out on

trading floor.

The effective partners of the BM&F will pay, at the most, 75% of the basic processing fee and 75%

of the other transaction costs. Institutional investors will pay 75% of the BM&F fees.

* For foreign investors, the BM&F also accepts a margin deposit in dollars or bonds of the U.S. government (T-Bonds, T-Notes,

and T-Bills). The margin must be deposited into the accounts of the BM&F with the settling bank in the US.

Trading Unit

BRL 100,000.00

Maturity

0.001 p.p. of the rate for the three first maturities0.01 p.p. of the rate for other maturities

Minimum Variation

Interest Rate Futures


Transaction Costs

Annual effective interest rate, based on a 252-business day year, rounded to the nearest thousandth


Last Trading Day

Last business day before the maturity of the contract.


Among derivatives traded on the BM&FBovespa, interest rate future contracts are the

ones with highest liquidity. In recent years, the total volume of trading as well the number

of open contracts increased substantially (Exhibits 45 and 46).

13 March 2014


Exhibit 45: Volume of DI interest rate future contracts on the BM&FBovespa

Exhibit 46: Number of Open Contracts by Time to Maturity

BRL bn Number of contracts (million)

2001 2003 2005 2007 2009 2011

138

2013

17

17

17

18

20

2134

37

31

10

43

34

4

19

57

39

18

20

77

31

5

21

57

36

614

55

72

11

22

106

74

12

28

114

67

37

122

18

86

32

21

2 years or more

1 to 2 years

Less than 1 year

0.9

2001

0.71.6

2.1

2003

2.3

2.7

3.7

0.61.3

5.6

2005

3.9

1.1

1.9

6.9

3.9

2.0

2.0

7.9

2007

2.8

1.11.5

5.3

3.9

1.3

2.1

7.2

2009

8.2

1.9

2.9

13.0

8.0

2.8

3.1

14.0

2011

9.7

3.9

3.7

17.3

7.1

3.5

3.1

13.8

2013

2 years or more

1 to 2 years

Less than 1 year

Source: BM&FBovespa, Credit Suisse Source: Credit Suisse

Each DI interest rate future contract has a par value of BRL 100,000.00 and contracts are

traded in the form of an annual rate with three decimal points, calculated for a calendar

year of 252 business days. The price (PU) is still used in the variation margin and is

calculated using the following formula:

Where:

i Negotiated rate of interestn Number of business days between the date of the transaction and the Last

Trading Day of the contract (business day prior to maturity)

=PU100,000

+( 1 i )n

252

The value of the daily adjustment of positions is calculated on a mark-to-market basis. The

Central Bank announces the adjustment price ( Pat ) , corresponding to the price consistent

with the reference DI rate calculated by the Cetip. The adjustment occurs accordingly to the

following:

Adjustment on the day of the transaction( ) NMPUPAtADt -= 1

Adjustment starting from the day after the transaction is executedADt = [ ] NMFCtPat-1PAt - 2

Where:

N Number of contracts traded

M Amount, in BRL, of each point of PU (=1.0)

= (1+CDIt-1 )FCt

1

252

Value of the daily adjustment, in BRL, related to day “t”ADt

Adjustment price announced by the BM&F related to day “t”PAt

Correction factor related to day “t”, calculated using the following formula1:FCt

CDI interest rate for the business day prior to the adjustment day (“t -1”), annualized based on ayear of 252 business days.

CDIt-1

1 If there is more than one CDI rate calculated between two consecutive trading sessions, FCt will be the Cumulative DI rate of all the rates published. These situations are very sporadic and occur, for example, when the BM&F closes for a public

holiday; thus a DI rate is published for a day with no trading session.

13 March 2014


We present below an example of a CDI interest rate future contract with maturity in

January 2017. The table refers to the daily marked-to-market gains and losses, according

to the calculation presented above. The contract refers to a purchase operation (long in

PU26

) of 150 contracts (N = 150) on 06 February, sold at 24 February 2014 (Exhibit 47).

Exhibit 47: Example of an interest rate future operation traded on BM&FBovespa

175,865.10Total Return

10,488.001.00039310.415017576-Feb-1412.68

12.75

purchase

end of day

70,636

70,706

ADFCDI rateNMnMarket Rate (%) PA

12.65 756 70,885 1 150 10.4 1.000393 22,664.1012.68 755 70,864 1 150 10.4 1.000393 (7,317.94)

12.75 754 70,735 1 150 10.4 1.000393 (23,570.70)

12.86 753 70,642 1 150 10.4 1.000393 (18,038.59)

12.74 752 70,820 1 150 10.4 1.000393 22,541.86

12.68 751 70,980 1 150 10.4 1.000393 19,844.87

12.59 750 71,213 1 150 10.4 1.000393 30,714.94

12.52 749 71,428 1 150 10.4 1.000393 28,035.74

12.51 748 71,407 1 150 10.4 1.000393 (7,370.92)

12.31 747 71,767 1 150 10.4 1.000393 49,871.83

12.19 746 72,001 1 150 10.4 1.000393 30,847.09

12.15 745 72,144 1 150 10.4 1.000393 17,154.82

7-Feb-1410-Feb-14

11-Feb-14

12-Feb-14

13-Feb-14

14-Feb-14

17-Feb-14

18-Feb-14

24-Feb-14

19-Feb-14

20-Feb-14

21-Feb-14

Source: Cetip, BM&FBovespa, Credit Suisse

8.1.2. Interest rate options

Future interest rate options traded at BM&FBovespa are European options on CDI interest rate

future contracts, i.e., they will be executed only at maturity. The seller of the option (call/put) will

receive the premium traded on the business day following the day of the transaction.

For each maturity date of future interest rate contracts, the BM&FBovespa announces the series

with option strike prices, expressed in the form of an effective interest rate for 252 business days

(Exhibit 48). The majority of the contracts are due in the first month of each quarter (January, April,

July and October), with the expiration day being the first business day of the month.

26

A long position in PU means a short position in rates, and, therefore, an expectation of reduction in the interest rate implied in the contract.

13 March 2014


Exhibit 48: Characteristics of the future interest rate options contract on the BM&FBovespa

The required margins are announced daily by the BM&FBovespa. The following assets are accepted as margin deposits: cash, gold, fixed income funds shares, or—at the BM&FBovespa’s discretion—public and private debt securities, letters of guarantee, insurance policies, equity interests, and shares in closed equity investment funds*.

No limits

Basic processing fee is calculated as a percentage of the difference between BRL100,000 and the

closing price (PU) of the DI futures contract:

Standard transaction: 3.0% and day trade: 1.5%.

Each option contract refers to an interest rate future contract; fee will be charged on option's

settlement.

For combined trades, the fee charged will be that of a day trade of future interest rates (1.5%).

* For foreign investors, the BM&FBovespa also accepts a margin deposit in dollars or bonds of the U.S. government (T-Bonds,

T-Notes and T-Bills). The margin must be deposited in the accounts of the BM&FBovespa at the settling bank in the US.

Call or Put Option under Interest Rate Futures Contract


Transaction Costs

Premium of the option, expressed in BRL


Trading Unit

Each option refers to an interest rate futures contract at a given maturity Maturity

Maturity occurs on the first trading session of the month of maturity of the option

BRL 0.001

Minimum Variation Strike Prices

Established and announced by BM&FBovespa, expressed as effective interest rate (p.a.), based on a year of 252 business days

Last Trading Day

On the maturity date of the option (day trade operations are not allowed on this day)


The BM&FBovespa offers three types of series, which are classified according to the

period between the option maturity and the maturity of the interest rate future contract, and

a fourth type that can be freely specified by BM&FBovespa:

Future interest rate contract matures 3 months after option

Type 1


Type 2


Type 3

The interest rate futures contract this option refers to is specified by the BM&F

Type 4

At the expiration date, the options are automatically converted into interest rate future

contract operations. Thus, both buyer and seller have to comply with the requirements

established in the interest rate future contracts, mainly with respect to guarantee margins

and contract settlement criteria.

On the date of exercise, the holder of a call (put) option will have the option to buy (sell), at

the CDI rate, a future interest rate contract object of the option, for the traded exercise

price. In other words, the holder of a call (put) option will have a short (long) position in PU,

calculated according to the following formula:

13 March 2014


Where:

i Negotiated rate of interest

n Number of business days between the date of the transaction and the last trading day of the contract (business day prior to maturity)

+=

(1

100,000

i)PU n

252

Interest rate option contracts were only created by the BM&FBovespa in August 2003. Their

liquidity is very low and concentrated in the Type 3 series (Exhibit 49). The number of open

contracts has increased sharply since 2009 (Exhibit 50).

Exhibit 49: Average daily trading volume of options of interest rate futures contracts on the BM&FBovespa

Exhibit 50: Number of interest rate options contracts

BRL mn million contracts

0.2

2003

1.2

2004

0.2

2005

0.5

2006

1.7

2007

7.1

2008

6.5

2009

4.3

2010

8.9

2011

9.1

2012

8.1

2013

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Call

Put

Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

Source: BM&FBovespa, Credit Suisse Source: BM&FBovespa, Credit Suisse

8.1.3. IDI options

The IDI is an index published by BM&FBovespa that accrues the DI rate daily using an

annual, 252-business day compounding convention. The initial value of the index was

set at 100,000 on 2 January 2009. IDI options are related to the forward value of this

index (Exhibit 51).

13 March 2014


Exhibit 51: Characteristics of a IDI index option contract on the BM&FBovespa

Processing fee is calculated as a percentage of the value of the transaction. In the exercise, it is

charged over the settlement amount:

Standard transaction: 2.25%;

Exercise and day trade: 1.10%.


BM&F fees: 0.9% of the basic processing fee.


trading floor.

The effective partners will pay at the most 75% of the basic processing fee and 75% of the other

Transaction Costs.

Institutional investors will pay 75% of the BM&F fees.



The required margins are announced daily by the BM&FBovespa. The following assets are accepted as margin deposits: cash, gold, fixed income funds shares, or—at the BM&FBovespa’s discretion—public and private debt securities, letters of guarantee, insurance policies, equity interests, and shares in closed equity investment funds*.

No limits

Call or Put Option of IDI Index


Transaction Costs

Premium of the option, expressed in points of the IDI index


Trading Unit

Each option refers to the value (in points) of the IDI index on a given maturity, multiplied by the BRL value of each point Maturity

Maturity occurs on the first business day of the month of maturity of the option

0.01 points of the index


Established and announced by BM&FBovespa, expressed in IDI index points for each maturity

Last Trading Day

Last business day before the maturity of the contract


Because the IDI option is on an index, and not on a financial instrument that matures at

some point after the option’s expiration such as a futures contract), an IDI option’s payout

depends only on the realized path of the DI rate prior to the option’s maturity. On the other

hand, the payout of an option on a futures contract (such as Pre-CDI options) or on a

swap depends not only on monetary policy moves that are realized during the option’s life,

but also depends on any expectations of future moves during the life of the underlying

financial instrument, which could affect its value.

Representing a way to trade a pure view on monetary policy on a given time period, IDI

options had a boom in open contracts starting in 2008 (Exhibit 52), and in 2009 the

liquidity of these options became higher than that of DI futures options (Exhibit 53). Almost

all contracts are concentrated in short-term expiries (one to twelve months).

13 March 2014


Exhibit 52: Number of Open IDI Contracts on BM&FBovespa, by Time to Maturity

Exhibit 53: Average Trading Volume of IDI Contracts on BM&FBovespa, by Time to Maturity

Thousands of contracts USD bn

12+

4 to 12

0 to 4

1.3 3.25.1

15.73.5

3.6

0.8

1.1

2.1

0.6

0.6 1.7

3.7 3.6

10.7

20.0

2005 2006 2007 2008 2009 2010

13.9 11.9

1.9

11.5

13.4

22.8

13.9

2011 2012 2013

1.6

3.6

5.3

2.42.93.7

9.0

20050.7

11.1

16.1

27.9

20060.7

11.5

13.5

25.7

2007

5.3

19.9

3.8

29.1

2008

4.0

22.6

8.0

34.7

2009

23.4

1.5

34.8

9.8

2010

6.3

11.8

18.2

2013

3.7

32.7

43.0

2012

6.5

32.2

2011

14.7

0.6

16.9

12+

4 to 12

0 to 4


8.1.4. BRL/USD futures contracts

BRL/USD futures contracts traded on the BM&FBovespa have relatively high liquidity,

especially when compared to the deals in the spot market. In general, the liquidity of the

futures dollar contracts is concentrated in the shorter maturities (mainly in the first

maturity), despite the existence of contracts with maturity of up to six years (Exhibits 54

and 55).

Exhibit 54: Volume of Open Dollar Futures Contracts on BM&FBovespa

Exhibit 55: Average Trading Volume of Dollar Futures Contracts on BM&FBovespa, by Maturity

thousand contracts USD bn

0

20

40

60

80

100

120

Dec-01 Dec-04 Dec-07 Dec-10 Dec-13

4 3

2001

3 3

2003

4

1

6

1

2005

9

2

14

2

2007

15

2

12

1

2009

15

1Other maturities

2nd maturity

1st maturity

15

2

16

2011

1

15

2013

11


The contract sets forth a daily adjustment of positions between buyers and sellers and

requires them both to deposit security margins in the BM&FBovespa (Exhibit 56). The

following assets are accepted as security margins: cash, gold, public and private debt

securities, letters of guarantee, insurance policies, equity shares and shares in closed

equity stock investment funds. The margins required for each contract are disclosed by the

BM&FBovespa on a daily basis, with a reduction of up to 20% for investors ranked as

hedgers by the central bank.

13 March 2014


Exhibit 56: Characteristics of a dollar futures contract on the BM&FBovespa

Upon maturity, the open positions will be settled by the BM&FBovespa using the PTAX800 FX rate, announced by the central bank, with up to four decimal points.The FX rate will be that verified on the last day of the month immediately prior to maturity month of the contract, regardless of whether or not, on this day, there is a trading session on the BM&FBovespa.Special conditions: If, for any reason, the central bank does not announce the FX rate corresponding to the last day of the month immediatelyprior to maturity of this contract, the BM&FBovespa may, at its criteria:a) extend the settlement of the contract until the official announcement; orb) use as a settlement value the adjustment price of the Last Trading Day or an amount arbitrated by the BM&FBovespa, if it believes said price is not representative.The BM&FBovespa may also, in any case, arbitrate a price for settlement of the contract if, at its criteria, it believes the price announced by the central bank and the last available adjustment price are not representative.

Processing fee charged on the adjustment price of the previous day, related to the first open maturity: Standard transaction: 0.12%; day trade: 0.06%. BM&FBovespa fees: 1.20% and 0.75% of the basic processing fee for normal and day trade

operations, respectively. For the operations carried out exclusively on the last two trading days and for the settlement of the

contract upon maturity, the BM&FBovespa fees will be calculated based on the minimum brokerage fee.

Transaction costs are payable on business day after the day on which transaction is carried out on trading floor.

The effective partners will pay at most 75% of the basic processing fee and 75% of the other Transaction Costs.

Institutional investors will pay 75% of the BM&FBovespa fees.



The daily oscillation limit is 5%, calculated over the adjustment price of the previous trading session for all the maturities open to trading. There will be no oscillation limit for the 1st

maturity on the last three trading days. The BM&FBovespa may, at any moment, alter oscillation limits via notifying the market at least 30 minutes in advance.

Future Exchange Rate (BRL/USD)

Settlement of the contracts

Transaction Costs

BRL per USD1,000.000, with up to three decimal points


Trading Unit

USD50,000.00

Maturity

All the months up to the maximum of 24 months. Contract matures on the first trading day of the month of maturity of the contract.

BRL0.50 per USD1,000.00

Minimum Variation

Last Trading Day



8.1.5. USD/BRL options

The dollar options traded on the BM&FBovespa follow the European pattern. Similar to the

future dollar contracts, the options are traded in lots of USD 50,000.00 and quoted as the

premium of the option in BRL per USD 1,000.00, with up to three decimal places. As in

USD/BRL futures, maturity dates of all contracts are the first business day of each month.

The liquidity of those options has increased until 2008, but has decreased in the following

years (Exhibit 57).

13 March 2014


Exhibit 57: Average daily volume of dollar futures options on the BM&FBovespa

USD mn

9

2002

623

20034

17

20041212

34

2005

1513

26

2006

40

26

21

2007

62

49

90

2008

55

35

42

2009

32

32

52

2010

Other maturities

2nd maturity

1st maturity

23

2011

1914

2012

18

812

2013

1512

25


The payments and receipts of premiums are made on the first business day after the

day of the transaction. For the settlement of the contract, the BM&FBovespa uses the

PTAX rate prevailing on the last business day of the month before that of the maturity

(Exhibit 58). Similar to the future dollar contracts, the BM&FBovespa may arbitrate the

FX settlement rate if the central bank does not announce the PTAX rate related to the

maturity date.

Exhibit 58: Characteristics of a dollar option contract on the BM&FBovespa


T-Notes and T-Bills). The margin must be deposited in the accounts of the BM&FBovespa with the settling bank in the US.

Processing fee is calculated as a percentage of the value of the transaction. For the exercise, it is

charged as a percentage of the settlement amount:


Exercise and day trade: 0.2%




trading floor.

The effective partners of the BM&F will pay, at most, 75% of the basic processing fee and 75% of the

other Transaction Costs.

Institutional investors will pay 75% of the BM&F fees.

The required margins are announced daily by the BM&F. The following assets are accepted as margin deposits: cash, gold, fixed income funds shares or at the BM&F’s discretion, public and private debt securities, letters of guarantee, insurance policies, equity shares and Shares in closed equity investment funds*.

No limits

Call or put options of BRL/USD futures contract


Transaction Costs

Premium of the option, in BRL per USD1,000.00, with up to three decimal points


Trading Unit

USD 50,000.00

Maturity

Contract matures on the first trading day of the month of maturity of the contract.

BRL 0.001 per USD 1,000.00


Fixed and announced by the BM&F, expressed in Reais per USD1,000.00

Last Trading Day



13 March 2014


8.1.6. Dollar Coupon (DDI)

The dollar coupon is the accumulated difference between the DI interest rate and the FX

rate (BRL/USD) variation during the term of the contract. In this case, the interest rate is

the accumulated effective one-day interest rate on interbank deposits (DI rate, calculated

by Cetip based on a year of 252 business days), and the exchange rate variation is

measured by the change in the PTAX dollar exchange rate (in other words, the dollar

coupon is the return of a dollar investment in the domestic interest market).

Each DDI contract represents USD 50,000.00 on the maturity date and the contracts are

traded as a linear annual rate with three decimal places, based on a 360 calendar-day. The

unit price (PU) is still used in the variation margin and is calculated using the following formula:

Where:

i Trading price in rate (“FX coupon”)

n Number of days between the trading day and the Last Trading Day+

=

3601

100,000

ni

PU

The daily adjustment of the position in BRL is determined by the following formulae:

Adjustment on the day of the transaction1 ( ) FXt-1PUPAtADt -= N M

Adjustment starting on day after transaction is executed2 ][ADt= FCtPat-1PAt

- FXt-1 N M

Where:

N Number of contracts traded

M Amount, in BRL, of each PU point (=0.5)

Amount of the daily adjustment, in BRL, related to day “t”ADt

Adjustment price announced by the BM&F related to day “t”PAt

Correction factor related to day “t”, calculated by the following formula1:FCt

Where:

=FCt

+(1 DIt-1 )1

252

FXt-1

FXt-2

DI interest rate related to the business day prior to the adjustment day, annualized based on a year of 252 business days

DIt-1

FX rate (PTAX) of the business day prior to the adjustment dayFXt-1

1If there is more than one CDI rate calculated between two consecutive trading sessions, FCt will be the cumulative DI rate of all the rates published. These situations are very sporadic and occur, for example, when the BM&F closes for a public holiday

and thus a DI rate is published that refers to a day with no trading session.

The dollar coupon (dollar return) of the DDI contract that is traded on the BM&FBovespa is

calculated based on the PTAX rate of the day before the deal instead of the spot rate at

the moment of the purchase. Therefore, it does not reflect the latest exchange rate value.

The dollar coupon calculated this way is known as a “dirty coupon”.

8.1.7. FRA of Dollar Coupon (FRC)

The FRA (Forward Rate Agreement) of Dollar Coupon (FRC) is an instrument created by the

BM&FBovespa in order to obtain a “clean dollar coupon”, i.e., the dollar coupon without the

FX change from the previous day to the transaction date. The FRC is not a contract, but a

transaction resulting from the combination of two DDI contracts, one long and one short. The

advantage of this instrument is that it makes it possible to trade the FRA in the spread

between DI against the USD without requiring two transactions in the DDI contract. Currently,

it is the most liquid contract involving a DDI transaction. The FRC transactions are

automatically transformed by the BM&FBovespa system into two different ones:

13 March 2014


the first transaction in the first DDI month27

(short leg), with a term of “n” calendar days; and

the second transaction, of a reverse nature, for a DDI maturity identical to the FRC

maturity (long leg), with a term of “m” calendar days.

Short legLong leg

t+mt+mt+nt+n

Each FRC contract is equivalent to a DDI contract at the long leg and a specific quantity of

contracts at the short leg. Considering the trading of qL FRC contracts, the number of short

leg contracts is obtained using the following formula28

:

=qs

qL

1+ cFRC n- m

360

Where:

cFRC “Clean FX coupon”

n Number of calendar days until maturity of short leg

m Number of business days until maturity of long leg

The dollar coupon of the short leg of FRC (cS) is given by the adjustment rate of the

transaction day, and the long leg coupon (cL) is calculated by the following formula:

1 + cS m

360 1 + cFRC

n-m

360 - 1

n360=cL

Consequently, after the definition of the dollar (dirty) coupons of both legs of the FRC, as

well as the quantities traded of each contract, the positions are adjusted on a daily basis

as two isolated DDI contracts (in opposite legs, i.e., long in the short leg and short in the

long leg or vice versa). After its creation in early 2001, the FRC quickly gained relevance

in dollar coupon trading, surpassing the number of average DDI traded contracts right after

its appearance and probably explaining some part of the reduction in liquidity of one-

legged DDI operations (Exhibit 59).

Exhibit 59: Average daily trading volume of DDI and FRC contracts on the BM&FBovespa

‘000 contracts

12.18.5

20.2

5.52.3 2.9 2.1 3.7 4.1 1.6 4.5 3.0 4.2

34.238.4

46.1

66.8

41.8

29.5

42.8 42.835.4

42.7

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

DDI

FRA

6.7 4.5 6.1

68.3 70.275.3

2011 2012 2013


27 As of the first day that precedes the last trading day of the first DDI month, the first position (short leg) will be initiated in the

second DDI month, which will be kept up to the day that precedes its last trading day, when the process will be repeated.

28 The number of short leg contracts has to be rounded to the whole number nearest to that calculated by the formula.

13 March 2014


8.2. Swaps

A swap is an exchange of risk between two parties, without exchange of principal. In Brazil,

swaps are made directly between parties (OTC) and they can be registered at the Cetip

system or at the BM&FBovespa. In general, most transactions are registered at the Cetip.

In the BM&FBovespa, the swap transactions involving guarantees of some of the parties

are the main ones to be registered.

The return on a swap is the difference between the indices of each side of the transaction.

In Brazil, the main swap contracts traded have the DI interest rate in one of the legs. The

correction factor of the part indexed to the DI rate is calculated by the following formula:

(1 + DIt-1z )

1

252+1=FCt

DI1- P

=AFCt

DI t

FCj

j=d

Where:

DIt-1DI interest rate corresponding to day “t-1”

AFCtAdjustment factor; cumulative between reference dateof the contract (“d”) and the “t” date

P Discount agreed upon between the parties in relation toDI interest rate (0 P 1)

In relation to the other indices of swap contracts, the most important are the following:

Fixed rate (PRE-DI swap)

USD (Dollar-DI swap)

IGP-M inflation (IGPM-DI swap)

IPCA inflation (IPCA-DI swap)

8.2.1. PRE-DI Swap

This type of swap exchanges a fixed rate for the accrued DI interest rate over an agreed

period. The market convention for this type of swap is to quote the fixed rate.

Where:

PRE

n

Fixed rate agreed upon between the parties

Number of business days between trading of the contract and the last business day prior to maturity

=AFCt

PRE +(1 PRE)n

252

The final amount to be settled between the parties will be the amount equivalent to the

profitability difference of the fixed-rate and the floating rate (DI rate) accumulated in the

period multiplied by the total volume of the transaction (VI):

VLt = (AFCt - AFCt )PRE DI

VI

If the difference is positive (negative), the investor at the fixed rate will receive (transfer)

the amount from (to) the investor at the DI rate.

The PRE-DI swap contract is similar to the interest rate futures contract traded on the

BM&FBovespa, except that it does not set forth the daily adjustment of positions: the

transfer of funds between the parties is effected only on the swap maturity date. However,

the liquidity of the PRE-DI swap contracts registered on the BM&FBovespa is very low

compared to that of the interest rate futures contracts (Exhibit 60).

13 March 2014


Exhibit 60: Average daily trading volume on the BM&FBovespa of PRE-DI swap and interest rate futures contracts

USD bn

0.00

0.04

0.08

0.12

0.16

0.20

10

30

50

70

90

110

130

150

Futures

Swap (RHS)

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


8.2.2. Dollar-DI Swap

The dollar-DI swap is a contract that exchanges the DI rate for a fixed rate plus the BRL-

USD exchange rate variation over an agreed period. The market convention for this type

of swap is to quote the fixed rate.

+1 IRUSDFXt-1

FXd-1 n

360=AFCt

USD

Where:

FXt-1 PTAX800 FX rate (BRL/USD) in “t-1”

Fixed rate agreed upon between the partiesIR

Number of calendar days between trading of the contract and the last business day prior to maturity

n

FXd-1 PTAX800 FX rate (BRL/USD) for the day before the reference date of the contract (“d”)


profitability difference of the interest rate of the contract plus the variation in the FX rate

(BRL/USD) and the floating rate (DI rate) accumulated in the period multiplied by the total

volume of the operation (VI):

VLt = (AFCt - AFCt )USD DI

VI

If the difference is positive (negative), the investor long in dollar will receive (transfer) the

amount from (to) the investor with a position at the DI rate. Similar to the others, the

liquidity of these contracts is very low (Exhibit 61).

13 March 2014


Exhibit 61: Average daily trading volume on the BM&FBovespa of USD-DI and DDI (Dollar Coupon) swap contracts

USD bn

0

100

200

300

400

500

600

700

800

USD-DI swap

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

Dollar coupon (DDI)


8.2.3. IGPM-DI and IPCA-DI Swaps

These types of swaps are exchanged at two floating rates: a fixed interest rate plus an

inflation correction (IGP-M or IPCA inflation) for the accrued DI interest rate over an

agreed period. The market convention for these types of swap is to quote the fixed rate,

known as “IGP-M coupon” or “IPCA coupon”.

+1 IRInflIndext-1

Indexd-1 =AFCt

Infl

n

252

Where:

Inflation index result (IGP-M or IPCA) in “t-1”Indext-1

Fixed rate agreed upon between partiesIR

Number of business days between trading of the contract and the last business day prior to maturity

n

Indexd-1 inflation index result for the day before reference date (“d”)


profitability difference of the fixed-rate interest rate corrected by the respective inflation

index and of the floating rate (DI rate) accumulated in the period multiplied by the total

volume of the operation (VI):

VLt = (AFCt - AFCt )Infl DI

VI

If the difference is positive (negative), the investor long in inflation – IGP-M or IPCA – will

receive (transfer) the amount from the (to the) investor at the DI rate. The IGP-M swaps

have good liquidity in the market, and, since 2007 (same year when NTN-Cs government

bonds linked to IGP-M stopped being issued), IPCA swaps contracts have gradually

become more traded than the IGPM-DI swaps (Exhibit 62).

13 March 2014


Exhibit 62: Average daily trading volume on the BM&FBovespa of IGPM-DI and IPCA-DI swap contracts

USD bn

84.3

152.7 158.0

342.2

229.9

158.9

80.7111.3

0.6 0.3 5.8

135.7

77.050.2

69.3

145.7

2003 2004 2005 2006 2007 2008 2009 2010

IGPM-DI

IPCA-DI

111.4

50.972.4

197.3 194.3

155.6

2011 2012 2013


13 March 2014


9. Taxation of Foreign Investments in Brazil In Brazil, the main taxes levied on financial investments are:

Income Tax (IR)

Tax on Financial Transactions (IOF)

9.1. Income Tax

In general, foreign investors residing in tax havens have the same tax treatment as a

Brazilian resident for income tax purposes. However, investors that do not reside in tax

havens receive different treatment. For tax purposes, Brazil’s Federal Revenue Service

considers a tax haven a country whose income tax rate is lower than 20% or whose laws

do not ensure transparency of the corporate structure of legal entities (Exhibit 63).

Exhibit 63: Tax Havens According to the Brazilian Federal Revenue Service

Andorra

Anguilla

Antigua and Barbuda

Netherlands Antilles

Aruba

Ascension Island

Commonwealth of the Bahamas

Bahrein

Barbados

Belize

Bermudas

Brunei

Campione d’Italia

Channel Islands (Alderney, Guernsey, Jersey, and Sark)

Cayman Islands

Cyprus

Cook Islands

Republic of Costa Rica

Djibouti

Dominica

United Arab Emirates

Gibraltar

Granada

Hong Kong

Kiribati

Labuan

Lebanon

Liberia

Liechtenstein

Macau

Madeira Islands

Maldives

Isle of Man

Marshall Islands

Republic of Mauritius

Monaco

Montserrat

Nauru

Niue

Norfolk Island

Oman

Panama

Pitcairn Islands

French Polynesia

Qeshm

American Samoa

Samoa

San Marino

Santa Helena

Saint Lucia

Saint Kitts and Nevis

Saint Pierre and Miquelon

Saint Vincent and the Grenadines

Seychelles

Singapore

Solomon Islands

Swaziland

Switzerland

Tonga

Tristan da Cunha

Turks and Caicos Islands

Vanuatu

US Virgin Islands

British Virgin Islands


Investments Subject to Special Taxation Regime

A special taxation regime is applicable to the financial investments of foreigners that,

under Resolution 2689, are not located in a tax haven (Exhibit 64).

13 March 2014


Exhibit 64: Income Tax Rates for Foreign Investors Subject to a Special Taxation Regime

• Fixed-income financial investments, carriedout on OTC markets

• Shares in fixed income investment funds (short and long maturity)

• Capital gains outside the stock market• Investments in corporate fixed-income bonds

(debentures)• Interest earnings from fixed-income investments• Interest on shareholders' equity (IOE)

• Investments in equity investment funds(FIAs)

• Swap operations, with or without stock market registration

• Transactions carried out on future settlement markets outside the stock market

• Public securities (starting in February 2006)• Bonds of infrastructure companies (starting in December 2011)• Shares of exclusive investment funds for non-resident investors holding at least 98% of the assets in public

securities• Capital gain on transactions carried out on securities, futures, and commodities exchanges, except swap

operations• Dividends received

15% Rate 10% Rate

Exemption


Other Foreign Investors, General Rule

Other foreign investors (i.e., foreign investors subject to Resolution 2689, residents in a

tax haven, and other foreign investors) are subject to the same tax treatment as an

individual residing in Brazil, as summarized in Exhibit 65.

Exhibit 65: Income Tax Rates for Other Foreign Investors Subject to General Taxation Regime

• Financial investments in fixed-income funds• Financial investments in public and private fixed-income bonds and swaps• Investment period:

− up to 180 days: 22.5%− 181 to 360 days: 20.0%− 361 to 720 days: 17.5%− more than 720 days: 15.0%

• Dividends

15% Rate 10% Rate

Exemption

25% Rate 30% Rate

• Day-trade operations • Interest on shareholders' equity (IOE)

• Financial investments in fixed-incomebonds and funds

• Investment period: up to 180 days

• Stock market transactions and investmentsin equity investment funds

• Operations with derivatives on the OTC market

Regressive Rate


13 March 2014


9.2. Tax on Financial Transactions (IOF)

Until October 2009, foreign investments in the financial and capital markets were subject

to a zero IOF rate. After several increases in the IOF tax levy on these investments, the

government has recently reduced the IOF rate back to zero:

On December 1, 2011, the IOF rate on foreign investments in equities was reduced

from 2% to 0% and in infrastructure bonds, from 6% to 0%. The IOF levy on foreign

investments in ADRs was kept at 1.5% until December 24, 2013, when it was reduced

to 0%.

On June 4, 2013, the IOF rate on all fixed-income securities fell from 6% to 0%, except

for securities maturing in less than 30 days. The rate of the IOF tax declines according

to the length of the investment, from 96% for one-day investments to 0% for investments

above 30 days.

13 March 2014


Appendix A: Financial System Entities

Regulatory and Oversight Entities

National Monetary Council (CMN)

The National Monetary Council (CMN) is composed of the Finance and Planning Ministries

and the chairman of the central bank. The CMN is the main normative body of the

Brazilian financial system, and it regulates the incorporation and operation of financial

institutions and is also responsible for supervising them. It has no executive function. The

CMN is also responsible for establishing the inflation target to be pursued by the central

bank and the long-term interest rate (TJLP, chapter 4). The inflation targets are

established two years in advance and may be revised in the year before the target takes

effect. In June 2013 the CMN confirmed the inflation target for 2014 and set the target for

2015, both at 4.5%, with a +/-2.0pp interval―the same target and tolerance range adopted

since 2006.

Central Bank of Brazil (BCB)

The Central Bank of Brazil (BCB) was created in 1965. It is an official federal body of the

Brazilian financial system. While the CMN is the principal normative body, the central bank

has executive functions in the financial system. It is responsible for enforcing compliance

with the CMN’s directives and decisions regarding monetary policy and the exchange rate

system and for monitoring the activities of financial institutions. The main objective of the

central bank is to ensure stability of the local currency’s purchasing power and soundness

of the Brazilian financial system, currently pursued under the inflation-targeting regime

(Decree 3088 of June 21, 1999).

Both the chairman and the governors of the central bank are appointed by Brazil’s president

and can be sworn in only after being approved in a Senate floor vote. Since the

implementation of the Real Plan (1994), the chairman and governors of the central bank

have had de facto autonomy, especially in the management of monetary policy. However,

their autonomy is not formally guaranteed by law and the governors do not have fixed

mandates.

The functions of the central bank include:

Managing monetary policy to meet the inflation target: One of the main institutions that

formulate monetary policies for the central bank is the Monetary Policy Committee

(Copom). The Copom is formed by the chairman and governors of the central bank and

is responsible for establishing monetary-policy directives and setting the primary interest

rate of the economy (Selic rate). From 2000 to 2005 Copom meetings were regularly

held once per month, but since 2006 the Copom has been meeting eight times a year

(every six or seven weeks) and as necessary. Extraordinary meetings can be called by

its chairman. Each meeting is divided into two parts in consecutive days, beginning on a

Tuesday. On the first day, the members of the committee discuss the macroeconomic

scenario and on the second day, the Copom sets the Selic rate and its bias. If a bias

other than neutral (i.e., a positive or negative bias) is set, the chairman of the central

bank can move the Selic basic interest rate in that direction before the next meeting.

Nevertheless, this has not occurred since June 2000, and all Copom decisions since

March 2003 have had a neutral bias. Otherwise, the target rate can only be changed at

an extraordinary meeting. The Selic rate is announced on the second day, after the

market close, and the minutes of each Copom meeting are published on Thursday on

the week following the meeting, at 8:30 a.m.

13 March 2014


Still regarding monetary policy guidance, the central bank is also responsible for

establishing the rules on capital requirement, which has been a complementary

instrument to the basic interest rate in the latest monetary cycles. Changes in and official

discussions regarding reserve requirement rates and other rules are not made on a

specific date or timeframe.

At the end of each quarter (usually on the last business day), the Inflation Report is

discussed at a Copom meeting. The Inflation Report is an important part of the inflation-

targeting regime and contains the official view of the central bank with respect to inflation

trends and the inflation projections of the central bank based on its econometric models.

Thus, it is an important instrument for signaling trends in monetary policy.

Managing international reserves: The central bank is responsible for managing Brazil’s

international reserves, including for making decisions on the purchase (and sale) of

dollars in the market and on investment policies. These purchases or sales are made

through authorized FX dealers (Chapter 3).

Organizing, regulating, and supervising the Brazilian financial system: The central bank

regulates the Brazilian financial system, grants authorizations, regulates the operation of

financial institutions, and is responsible for regulating bank lending. The supervisory

activities can be performed either directly or indirectly. Direct supervision is performed

by technical teams inside the central bank’s regional offices, according to basic

guidelines. Indirect supervision consists of monitoring, through a computer system,

financial institutions and conglomerates, regardless of any request for such supervision.

Any irregularities detected are fed into the central bank's information system

(SISBACEN), enabling direct monitoring.

Brazilian Securities Commission (CVM)

The Brazilian Securities Commission (CVM) is a federal agency subordinated to the

Ministry of Finance created in 1976 under Law 6385, as amended by Laws 10411 of 2002

and 10303 of 2001. It is administratively independent―not hierarchically subordinated to

any other entity―and empowered to regulate, govern, and supervise the activities of all

capital market participants. The main objective of the CVM is to regulate and strengthen

the capital markets in Brazil. Its regulatory activities encompass all matters related to the

Brazilian securities market, such as:

registration of publicly traded companies, offers, and asset distribution (e.g., stocks and

bonds);

accreditation of independent auditors and mutual fund managers;

establishment of rules concerning the creation, operation, and operational procedures of

stock exchanges and securities trading and intermediation firms; and

suspension of issuance, distribution, or trading of a specific asset or ordering the

withdrawal of rights from stock markets.

Brazilian law empowers the CVM to investigate, analyze, and set penalties for any

irregular activity in the securities market. The supervisory activities involve monitoring the

information disclosure process and the performance of all securities traded.

The CVM comprises a superintendence body, which is in charge of developing and

implementing policies, and a general superintendency above it. Concerning foreign

investments, the Superintendency of Institutional Investor Relations (SIN) is responsible

for the registering and following up on foreign and domestic investors. The

Superintendency of International Relations (SRI) represents the CVM in dealings with

international organizations.

13 March 2014


Other Important Entities

Brazilian Association of Financial and Capital Markets Entities (Anbima)

Created at the end of 2009 from the merger of the Brazilian Association of Investment

Banks (Anbid) and the Brazilian Association of Financial Market Institutions (Andima), the

Brazilian Association of Financial and Capital Markets Entities (Anbima) represents

financial institutions of the capital and financial markets, acting as a private regulator and

supervising compliance of its members with the best practices created by the association

itself. As of the beginning of 2014, Anbima had over 309 member institutions.

In addition to its regulatory role, Anbima is also one of the largest providers of statistics to

local financial markets, using data resources previously owned by Anbid and Andima

(such institutions no longer exist as separate entities).

Brazilian Association of Investment Banks (Anbid)

Anbid was created in 1967 and represented and coordinated the activities of Brazilian

investment banks. It acted to strengthen capital markets as an instrument to finance

growth, supporting CVM as a supervisor, providing incentives to members for the adoption

of best practices and respecting investors’ rights, improving services and operational

practices, enhancing law, regulatory aspects and taxation of capital markets, among other

functions. In 1999, in addition to the representative and informational functions, the

company started its self-regulatory activities.

Anbid used to provide data mainly on funds, corporate finance (mergers and acquisitions,

equity and debt capital markets), private banking, and custody services.

Brazilian Association of Financial Market Institutions (Andima)

Established in 1971, Andima was a non-profit class entity whose members included

numerous financial institutions, from full-service, commercial and investment banks to

stock brokers and securities distributors.

Its main objective was to provide technical and operating support to these institutions,

encompassing daily monitoring of market behavior, legal supervision, publication of

statistical data and prices to the market, development of systems to improve financial

transactions, and provision economic analyses and reports with important information on

the Brazilian financial system.

Andima created important systems, ensuring financial transactions greater security,

transparency and agility:

The Special Settlement and Custody System (Selic), an electronic trading system for

public securities;

The Center for the Custody and Financial Settlement of Securities (Cetip), which is an

entity specialized in trading of private securities and responsible for calculating and

releasing data on the interbank deposit certificate (CDI) rate;

The Brazilian Bond System (SND), developed by Andima and operated by Cetip, where

debentures are held in custody; and

The System for Protection Against Financial Risks (SPR), which enables the registration

of swaps without guarantee, also accepting the registration of swap transactions with

delimiters (caps, floor, collar, and third curve delimiter), swaps with barriers (knock-in,

knock-out and knock-in/out), and swaptions.

13 March 2014


Andima was known for its experience in pricing government bonds. It offered the public

indicative rates for all market maturities of federal domestic public securities. It also

published statistics on stocks and the profitability and turnover of Bank Deposit Certificates

(CDBs) (such statistics are currently published by Andima). These prices have been used

as parameters for the market to rate the bonds that comprise the portfolios of financial

institutions and asset managers.

BM&FBovespa (Securities, Commodities and Futures Exchange)

After the merger between the Brazilian Mercantile and Futures Exchange (BM&F) and the

São Paulo Stock Exchange (Bovespa), the BM&FBovespa became the 17th-largest

exchange in the world, by market cap of listed companies (Exhibit 66), and the 11th

largest by market cap among companies newly listed in 2013 (Exhibit 67).

Exhibit 66: Market Cap of Companies Listed on Stock Exchanges Exhibit 67: Ranking of World Exchanges

USD trillion, September 2013 Position

Taiwan SE Corp.

Johannesburg SE

BM&FBOVESPA

National Stock Exchange India

BSE India

BME Spanish Exchanges

NASDAQ OMX Nordic Exchange

Korea Exchange

Australian SE

Shenzhen SE

SIX Swiss Exchange

Deutsche Börse

TMX Group

Shanghai SE

Hong Kong Exchanges

NYSE Euronext (Europe)

London SE Group

Japan Exchange Group - Tokyo

NASDAQ OMX

NYSE Euronext (US)

0.8

0.9

1.1

1.1

1.1

1.1

1.2

1.3

1.4

1.5

1.5

1.9

2.2

2.6

3.1

3.5

4.2

4.5

6.0

17.4

Marketcap

Listedcompanies

New listingsvalue (2013)

19 15 29

18 23 12

17 24 11

16 10 19

14 1 33

15 4 123

12 17 28

13 8 NA

11 7 84

10 11 NA

9 28 1

8 18 14

7 2 114

6 13 252

5 9 110

4 12 37

3 3 61

2 5 116

1 6 178

SIX Swiss Exchange

Taiwan SE Corp.

Johannesburg SE

BM&FBOVESPA

National Stock Exchange India

BSE India

BME Spanish Exchanges

NASDAQ OMX Nordic Exchange

Korea Exchange

Australian SE

Shenzhen SE

Deutsche Börse

TMX Group

Shanghai SE

Hong Kong Exchanges

NYSE Euronext (Europe)

Japan Exchange Group - Tokyo

NASDAQ OMX

NYSE Euronext (US)

Source: World Federation of Exchanges, Credit Suisse Source: World Federation of Exchanges, Credit Suisse

BM&FBovespa trades a broad range of assets, comprising operations formerly carried out

separately by BM&FBovespa and Bovespa.

São Paulo Stock Exchange (Bovespa)

The São Paulo Stock Exchange (Bovespa) traded assets, contracts and financial securities

such as stocks, options, stock futures, stock forwards, bonds, Certificates of Real Estate

Receivables (CRIs), and receivables-backed investment funds (FIDCs). It was formed by a

stock market segment and an OTC segment. The fixed-income securities were traded on

Bovespa Fix and on SomaFix, markets that traded bonds, CRIs, and FIDC shares.

Brazilian Mercantile and Futures Exchange (BM&F)

The BM&F created an environment for the trading of commodities and futures contracts in

the forward and futures segment. It comprised three clearinghouses—for derivatives (cash,

13 March 2014


forward, futures, options, and swap agreements), foreign exchange, and securities—that

were in charge of the settlement of all trades with a risk management structure in place to

eliminate the main counterparty risks.

Brazilian Clearing Corporation (CBLC)

The former Brazilian Clearing Corporation (CBLC), renamed Equities Settlement House,

was created in 1997 as a stock corporation resulting from a split-off of the net equity of

Bovespa. After the merger between Bovespa and BM&F in 2008, it became one of the four

clearing houses of the BM&FBovespa.

The Equities Settlement House settles transactions carried out using trading systems

PUMA and Bovespa Fix. PUMA trades equities (spot and derivatives markets, e.g.,

options, forward, and futures) and Bovespa Fix trades corporate bonds (final transactions

in the spot market).

The Equities Settlement House also acts as central depository of equities and corporate

bonds and offers a securities lending service (BTC), secured by BM&FBOVESPA.

Individual accounts make it possible to identify the final investor of the transactions

performed.

In the chain of responsibilities, the Equities Settlement House ensures settlement of the

obligations of a clearing agent to other clearing agents. Each clearing agent, in turn, is

liable for any default by brokers and qualified investors related to it. Finally, brokers are

liable for the default of their clients. As a general operating rule, all clearing agents must

make a margin deposit to cover the risks of positions under their responsibility. Based on

previously deposited margins, the Equities Settlement House grants an operating limit to

each clearing agent. In turn, each clearing agent, following their own evaluation criteria,

allocates the limit ascribed by the system among brokers and qualified investors related to

it. The operating limit may be divided among different markets.

Center for Custody and Financial Settlement of Securities (Cetip)

The Center for Custody and Financial Settlement of Securities (Cetip) was created in 1986

to meet the need of an electronic system for financial custody and settlement in the

corporate bond market. Cetip S.A. is a stock corporation that offers the following services:

registration, central depository, trading, and settlement of assets and securities. Its

activities are regulated by the Brazilian Securities Commission (CVM) and the Central

Bank of Brazil.

It is the central depository for most corporate bonds29

, state and municipal government

bonds, and treasury bonds. As depository, it processes the issuance, redemption, and

custody of securities and, if the case, the payment of interest and other related events.

Such securities are transferred to the Cetip at the time they are registered and the

registration agent holds physical custody of them. Sale and purchase transactions are

carried out in the over-the-counter market, including those processed through CetipNet

(electronic trading system).

Cetip also calculates the DI rate (one-day interbank deposit rate), which is the average

interest rate charged in the interbank market.

29

Bank deposit certificates (CDB), non-transferable certificates of deposit (RDBs), interbank deposits (DI), bills of exchange (LC), real estate bills (LH), bonds and commercial paper, etc.

13 March 2014


Appendix B: Requirements for Foreign Investors Resolution 2689/2000 of the National Monetary Council (CMN) regulates investments in

the financial and capital markets by foreign investors not residing in Brazil. According to

the Resolution, before making an investment in Brazilian assets, investors have to comply

with two basic requirements:

Appoint at least one representative in Brazil

File for registration with the CVM and Brazil’s Federal Revenue Service.

Appointment of Representatives in Brazil

Individual or corporate foreign investors have to appoint one or more representatives in

Brazil to the following roles:

Legal representative, who is responsible for:

- Filing for the investor’s registration with the CVM and the central bank and keeping

it up to date and providing these bodies with all information requested on the

investor and his/her investments

- On a monthly basis, submitting to the CVM the breakdown of the investor’s

portfolios

- Paying the quarterly portfolio inspection fee to the CVM30

Fiscal representative, who is responsible for:

- Complying with the tax obligations stemming from the investor’s transactions

Custodian, who is responsible for:

- When requested, providing the CVM with the registrations related to the individual

investments of non-resident investors

- Notifying the CVM of all transfers of securities among different accounts held by

an investor

- Providing, on a monthly basis, information to the central bank on the positions held

in custody by non-resident investors

Filing with the CVM

The legal representative of a non-resident investor has to be registered with the CVM. The

registration consists basically of providing information on the investor and a list of the

representatives appointed in Brazil (Appendix C). Within 24 hours, the CVM will provide

the investor with an Investor Operational Code and request the investor registration as a

corporate or individual taxpayer with Brazil’s Federal Revenue Service, which will provide

a registration number in the Brazilian Register of Legal Entities (CNPJ) or the Brazilian

Individual Taxpayer Registry (CPF), respectively.

30

The inspection fee is paid on a quarterly basis, and the calculation basis is the net asset value of the portfolio, as ascertained on 31 December of the previous year. For a net asset value of up to BRL 4.15 million, the fee is 0.1% of the net asset value. For portfolios with a net asset value above BRL 4.15 million, the fee is BRL 7,872.65.

13 March 2014


Appendix C: Form for Foreign Investor’s Registration with the CVM

Filing Form for Non-Resident Investor’s Registration with the CVM (click

here to access the form)

A. Identification of the non-resident investor

1. Individual or company name of the investor:

2. Address:

City:

State or province:

Country of headquarters/domicile:

Postal code:

Nationality:

3. Internet address:

4. Country of incorporation:

5. Description:

a. ( ) Commercial banks, investment banks, savings and loan associations,

global custodians and similar institutions, regulated and monitored by the

relevant governmental authorities;

b. ( ) Insurance companies regulated and monitored by the relevant

governmental authorities;

c. ( ) Corporations or entities whose purpose is the distribution of issue of

securities or act as underwriters in the trading of securities, acting on their

own account or for other parties, registered and regulated by bodies

recognized by the CVM;

d. ( ) Pension funds regulated by the relevant governmental authorities;

e. ( ) Non-profit institutions as long as regulated by the relevant governmental

authorities;

f. i. Any entity whose purpose is the investment of funds in money and capital

markets in which only those individuals and legal entities residing and

domiciled abroad participate, provided it is registered and regulated by an

entity recognized by the CVM;

g. ii. Any entity whose purpose is the investment of funds in money and capital

markets in which only those individuals and legal entities residing and

domiciled abroad participate, provided that the portfolio is managed on a

discretionary basis by a professional manager registered and regulated by an

entity recognized by the CVM.

h. ( ) Other collective investment funds or entities;

i. ( ) Legal entities incorporated abroad;

j. ( ) Individuals domiciled abroad.

http://www.cvm.gov.br/port/relinter/ingles/info_invest_estrang-e.asp

http://www.cvm.gov.br/port/relinter/ingles/info_invest_estrang-e.asp

13 March 2014


6. Type of investor:

a. ( ) Account holder of own account;

b. ( ) Name holder of an omnibus (collective) account;

c. ( ) Participant (passenger) in omnibus account:

_______________________________

B. Identification of the representative

1. Representative

Name or corporate name:

Address:

City: State:

CEP:

Telephone: Fax:

CNPJ/CPF:

Legal status: Area of activity:

Internet Address:

Responsible for registration:

( ) Yes

( ) No

2. Jointly responsible representative referred to in Paragraph 2. of art.3 of this

resolution (if applicable)

Name of individual or company

Address:

City: State:

CEP:

Telephone: Fax:

CNPJ/CPF:

Legal status: Area of activity

Internet address:

C. Tax status of investor in Brazil

1. Taxes on capital gains:

( ) Exempt

( ) Not exempt

2. Taxes on earnings:

( ) Exempt

( ) Not Exempt

3. Tax representative of the investor

Name:

Address:

CPF/CNPJ:

13 March 2014


D. Investor declaration:

I hereby declare, under penalty of law and for purposes of this document, that the

information provided herein is true, and that I accept the responsibilities entailed in

furnishing such information.

--------------------------------------------------------------------------------

Signature of non-resident investor Date

--------------------------------------------------------------------------------

Representative’s signature

--------------------------------------------------------------------------------

Signature of jointly responsible party

E. Identification codes:

CVM code:

RDE No.:

____________________________________________________________________________

13 March 2014


Appendix D: Brazil Local Markets in LOCuS Introduction

LOCuS is a toolbox available to Credit Suisse clients that compiles information on the

fixed-income markets of various countries (including developed countries and emerging

markets). LOCuS provides information on sovereign and private fixed-income bonds,

financial derivatives, especially interest rates and currency derivatives. In addition to

information on financial assets, the system also provides Credit Suisse reports and

forecasts for the main macroeconomic variables for covered countries.

LOCuS enables the user to obtain and manipulate data within the system itself, using

calculation spreadsheets, graphs and statistical analysis tools. The system also enables

the user to share data with other users of the system and with the sales team of Credit

Suisse, via instant massages or e-mail. Users can use the pages already provided by

Credit Suisse or create their own pages, incorporating the information they wish to track.

The system also enables these pages to be shared with other users.

There is no need to install any software in the user’s machine in order to access LOCuS.

All you have to do is access Credit Suisse’s website and follow these steps:

Open the URL: http://www.credit-suisse.com/locus/

Click on your region on the map to access the closest server

Type in your username and password (which you must request from the sales team)

The main screen of LOCuS will be shown in a new window in the Internet navigator. The

form of navigating on LOCuS is similar to that of the Internet, with access to the pages via

links (Exhibit 68).

Exhibit 68: LOCuS Main Screen


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

13 March 2014


Brazil in LOCuS

The pages related to Brazilian financial assets are in the Emerging Mkts LATAM

Brazil folder (Exhibit 69).

Exhibit 69: Brazil Home Page in LOCuS


Assets Traded in the External Market

For this category, you can find data, graphs and research reports related to Brazilian

financial assets traded in international markets, including:

Sovereign external bonds (BRA Sov Bond Grid folder): complete list of the sovereign

bonds traded abroad, broken down by currency, with the characteristics of the bonds

and trading prices.

Credit Default Swap (Sov CDS Mkt folder): section dedicated exclusively to CDS, with

pricing, scenario and historical analysis.

Relative performance (Intra-Country folder): contrasts performance of different Brazil

bonds, Exhibit 70.

13 March 2014


Exhibit 70: Brazil Home Page in LOCuS, Local Markets, Intra-Country Folder

Source: Company reports

Assets Traded in the Local Market

This section presents the main financial assets traded in the local market, as well as the

publications containing the recommendations of Credit Suisse’s team of fixed-income

strategists.

Government Bonds (BRA Local Govt Bonds folder): page with the descriptions of

the main federal public bonds traded in the local market. The main page presents the

data series of the interest rates implicit in the main bonds (LTNs, NTN-Bs and NTN-Fs),

as well as the breakeven inflation implicit in the NTN-Bs, which are bonds linked to IPCA

inflation (Exhibit 71). In addition to yield and market price data, the page has links to

access the monthly timetable of auctions announced by the Treasury, as well as the

results of the latest auctions and the rates and trading volumes in the secondary market.

There is also a page dedicated exclusively to NTN-Bs, in the NTNB folder, showing yield

curves and historical comparisons for the different tenures of these bonds.

13 March 2014


Exhibit 71: Brazil Page in LOCuS, Local Markets, Government Bonds Folder


NTNB: The NTNB Inflation-linked Bond Calculator lets the user override the Settle Date,

Inflation Rate and Yield of the inflation-linked Brazilian NTNB bonds, and calculate the

resulting price, duration, and convexity.

PRE-CDI: Information on interest rate futures contracts with fixed maturity dates (traded

on the BM&FBovespa), as well as the profitability implicit in the contracts for maturities

in moving windows, of six months to ten years. In the drop-down of the PRE-CDI folder

(Exhibit 72), you can access various calculation tools, as well as the data series of the

rates traded.

13 March 2014


Exhibit 72: Brazil Page in LOCuS, Local Markets, PRE-CDI Folder


Country Research: On this page you can find a list of the latest strategy and economics

reports for Brazil, organized by date, displaying a small summary for each publication

(Exhibit 73).

13 March 2014


Exhibit 73: Brazil Page in LOCuS, Research


Functions of LOCuS

Among the various functionalities of LOCuS are Historical Analysis, used to create charts

for analyzing and monitoring data, and My Sheets, which allow users to build their own

customized tools and monitors. Below, we will briefly describe how to use these resources.

Historical Analysis

In this example, we will create the historical breakeven inflation graph calculated from the

NTNF-17 and the NTNB-17 using the following expression:

( )( )

11

1-

+

+=

NTNB

NTNFNTNB

Y

YBE

1. In the menu on the left hand side, click in Tools Hist Analysis

2. Create a new workspace by clicking in New Workspace (or choose one of the existing

workspaces)

3. Click in the Expression field; in the first line A, type the beginning of the breakeven

inflation’s expression: “(1+”

13 March 2014


4. Click on the Instruments button. A screen will appear containing all the assets

registered in LOCuS. Search for NTN-F Jan17 in the path: Emerging Markets Bond

LC Sov Latam Brazil BNTNF BNTNF 10.000 01/01/201731

5. In Fields, on the right hand side, choose Yield Ask Close (Yld Ask (Cls) ) in the

All fields tab and then click in the Select button to paste the NTN-F yield in the

expression of the breakeven inflation we are writing.

6. The series [BNTNF 10.000 01/01/2017: Yld Ask (Cls)] returns the yield of the bond as

a percentage. Thus, you should divide the result by 100. As a result, the expression

would be: “(1+ BNTNF 10.000 01/01/2017: Yld Ask (Cls)]/100)”

7. Type in the remainder of the breakeven inflation, repeating the previous step for the

NTN-B yield (in the Instrument Chooser Window, in the Emerging Markets Bond

LC Sov Latam Brazil BNTNB tab). The result should be:

“(1+[BNTNF 10.000 01/01/2017: Yld Ask (Cls)]/100)/

(1+[BNTNB 6.000 05/15/2017: Yld Ask (Cls)]/100)-1”

8. In order to obtain the amounts as a percentage, multiply by 100. As a result, the final

expression would be:

“((1+[BNTNF 10.000 01/01/2017: Yld Ask (Cls)]/100)/

(1+[BNTNB 6.000 05/15/2017: Yld Ask (Cls)]/100)-1)*100”

9. In the Date Options field, choose the number of preceding months from the current

date that will be displayed in the chart. Additionally, choose a name for the curve to be

displayed in the Title field.

10. Now your graph is ready to be displayed. To do so, simply check the box next to the

expression under the Draw column and click in Draw Chart (Exhibit 74).

31

Note that the number 10,000 represents the annual interest rate of coupons, and the date 01/01/2017 represents the bond’s maturity date

13 March 2014


Exhibit 74: Historical Analysis Feature


LOCuS also offers resources ranging from simple arithmetic operations to more

sophisticated manipulations, such as econometric regressions. The full list with the

available features and their descriptions may be accessed by clicking on the Formula

button on the right hand side of the Instrument button.

My Sheets Feature

The My Sheets tool allows users to create customized pages in LOCuS. For this purpose,

it has a set of tools called Components, which allow users to create graphs, insert

spreadsheets or perform statistic data analyses. Also, it allows users to paste any graphs

or tables from other LOCuS pages, assembling a page with the data that the user wants to

track.

The example below presents the procedure to build a table with yields, prices and other

analytics of some Brazilian bonds.

1. On the upper toolbar, click in the File New Spreadsheet menu.

13 March 2014


2. In the spreadsheet, select the cell to enter data and click in the Tools Instrument

Chooser menu.

3. Select the bond in Emerging Markets Bond LC Sov LATAM BRAZIL

BRAZIL 10.250 01/10/2028. Select the bond’s fields in Select Fields Yld Ask and

then click in Select in order to paste the Global 2028 USD yield in the spreadsheet.

Return to the spreadsheet, click in the expression field and hit Enter to confirm it.

Select another cell and repeat this procedure to choose other fields (e.g., Price, DV01,

Duration, Convexity).

Similar to Historical Analysis, the Spreadsheet component also has many features to

manipulate data. The full list with the available features and their descriptions can be

accessed by clicking with the right button of your mouse in any cell of the spreadsheet,

and then choosing Insert Function.

Charts and other components can also be imported from pre-existent pages, by right-

clicking on the wanted component and then clicking on Copy Chart / Spreadsheet /

Color Grid to Clipboard and then right-clicking on the background of the blank page and

then on Paste component(s). After editing the new page, it is possible to save it with a

custom name, by clicking on the File Save menu, and reload this page in the File

Open… menu.

13 March 2014


List of Web Sites32

Financial Market Associations

Brazilian Association of Financial and Capital Markets Entities (Anbima)

http://www.anbima.com.br

Exchange

BM&FBovespa (securities, commodities and futures exchange)

http://www.bmfbovespa.com.br/en-us/home.aspx?idioma=en-us

Clearings and Depository

Center for the Custody and Financial Settlement of Securities (Cetip)

http://www.cetip.com.br/?lang=en-us

Special Settlement and Custody System (Selic)

http://www.bcb.gov.br/?FEDSECURITIES

Financial Market Structure

http://www.bcb.gov.br/?COMPOSITION

Economic Data

Central Bank of Brazil

http://www.bcb.gov.br/?TIMESERIESEN

Data from Brazil’s Applied Economic Research Institute (IPEA)

http://www.ipeadata.gov.br

Brazilian Statistics Bureau (IBGE)

http://www.ibge.gov.br/english/

Fiscal Policy


http://www.bcb.gov.br/?FISCPOLICY

Treasury

https://www.tesouro.fazenda.gov.br/en/fiscal-policy/fiscal-planning/central-government-

primary-balance

Public Debt


http://www.bcb.gov.br/?DOMESTIC

Treasury

https://www.tesouro.fazenda.gov.br/en/

Monetary Policy

Minutes of the meetings of the Monetary Policy Committee

http://www.bcb.gov.br/?COMMITTEE

32

Credit Suisse has not reviewed the sites and has no liability for their content. The above links are provided solely for convenience and information purposes. Following this link or any other link on Credit Suisse's Web site will be at your own risk.

http://www.anbima.com.br/

http://www.bmfbovespa.com.br/en-us/home.aspx?idioma=en-us

http://www.cetip.com.br/?lang=en-us

http://www.bcb.gov.br/?FEDSECURITIES

http://www.bcb.gov.br/?COMPOSITION

http://www.bcb.gov.br/?TIMESERIESEN

http://www.ipeadata.gov.br/

http://www.ibge.gov.br/english/

http://www.bcb.gov.br/?FISCPOLICY

https://www.tesouro.fazenda.gov.br/en/fiscal-policy/fiscal-planning/central-government-primary-balance


http://www.bcb.gov.br/?DOMESTIC

https://www.tesouro.fazenda.gov.br/en/

http://www.bcb.gov.br/?COMMITTEE

13 March 2014


Inflation-targeting system

http://www.bcb.gov.br/?INFLATION

Inflation Report of the Central Bank of Brazil

http://www.bcb.gov.br/?INFLAREPORT

Market Readout (weekly report) of the Central Bank of Brazil

http://www.bcb.gov.br/?MARKETREADOUT

Market Readout (time series data) of the Central Bank of Brazil

http://www.bcb.gov.br/?TIMESERIES

Other Information

Brazil Excellence in Securities Transactions (BEST Program)

http://www.bestbrazil.org.br

Regulation of Interest to Foreign Investors (CVM)

http://www.cvm.gov.br/ingl/regu/regu.asp

Government Resources

Brazil’s government official portal

http://www.brazil.gov.br


http://www.bcb.gov.br/?english

Receita Federal do Brasil (Brazil's Federal Revenue Service)

http://www.receita.fazenda.gov.br/Principal/Ingles/Versao2/default.asp

Brazilian Securities Commission (CVM)

http://www.cvm.gov.br/ingl/indexing.asp

Ministry of Finance

http://www.fazenda.gov.br

Treasury

https://www.tesouro.fazenda.gov.br/en/fiscal-policy/fiscal-planning/central-government-

primary-balance

News Sources

Folha de São Paulo

http://www1.folha.uol.com.br/internacional/en/

O Estado de São Paulo

http://www.estado.com.br

O Globo

http://www.oglobo.com

Valor Econômico

http://www.valor.com.br/

http://www.bcb.gov.br/?INFLATION

http://www.bcb.gov.br/?INFLAREPORT

http://www.bcb.gov.br/?MARKETREADOUT

http://www.bcb.gov.br/?TIMESERIES

http://www.bestbrazil.org.br/

http://www.cvm.gov.br/ingl/regu/regu.asp

http://www.brazil.gov.br/

http://www.bcb.gov.br/?english

http://www.receita.fazenda.gov.br/Principal/Ingles/Versao2/default.asp

http://www.cvm.gov.br/ingl/indexing.asp

http://www.fazenda.gov.br/



http://www1.folha.uol.com.br/internacional/en/

http://www.estado.com.br/

http://www.oglobo.com/

http://www.valor.com.br/

GLOBAL FIXED INCOME AND ECONOMIC RESEARCH Dr. Neal Soss

Global Head of Economics and Demographics Research (212) 325 3335

[email protected]

Ric Deverell Global Head of Fixed Income and Economics Research

+44 20 7883 2523 [email protected]

ECONOMICS AND DEMOGRAPHICS RESEARCH

GLOBAL / US ECONOMICS

Dr. Neal Soss

(212) 325 3335

[email protected]

Jay Feldman

(212) 325 7634

[email protected]

Dana Saporta

(212) 538 3163

[email protected]

Isaac Lebwohl

(212) 538 1906

[email protected]

Axel Lang

(212) 538 4530

[email protected]

Xiao Cui

(212) 538 2511

[email protected]

LATIN AMERICA (LATAM) ECONOMICS

Alonso Cervera

Head of Latam Economics

52 55 5283 3845

[email protected]

Mexico, Chile

Casey Reckman

(212) 325 5570

[email protected]

Argentina, Venezuela

Daniel Chodos

(212) 325 7708

[email protected]

Latam Strategy

Juan Lorenzo Maldonado

(212) 325 4245

[email protected]

Colombia, Peru

Di Fu

(212) 538 4125

[email protected]

BRAZIL ECONOMICS

Nilson Teixeira

Head of Brazil Economics

55 11 3701 6288

[email protected]

Daniel Lavarda

55 11 3701 6352

[email protected]

Iana Ferrao

55 11 3701 6345

[email protected]

Leonardo Fonseca

55 11 3701 6348

[email protected]

Paulo Coutinho

55 11 3701-6353

[email protected]

EURO AREA / UK ECONOMICS

Neville Hill

Head of European Economics

44 20 7888 1334

[email protected]

Christel Aranda-Hassel

44 20 7888 1383

[email protected]

Giovanni Zanni

44 20 7888 6827

[email protected]

Violante di Canossa

44 20 7883 4192

[email protected]

Steven Bryce

44 20 7883 7360

[email protected]

Mirco Bulega

44 20 7883 9315

[email protected]

EASTERN EUROPE, MIDDLE EAST AND AFRICA (EEMEA) ECONOMICS

Berna Bayazitoglu

Head of EEMEA Economics

44 20 7883 3431

[email protected]

Turkey

Sergei Voloboev

44 20 7888 3694

[email protected]

Russia, Ukraine, Kazakhstan

Carlos Teixeira

27 11 012 8054

[email protected]

South Africa

Gergely Hudecz

33 1 7039 0103

[email protected]

Czech Republic, Hungary, Poland

Alexey Pogorelov

7 495 967 8772

[email protected]

Russia, Ukraine, Kazakhstan

Natig Mustafayev

44 20 7888 1065

[email protected]

EM and EEMEA cross-country analysis

Nimrod Mevorach

44 20 7888 1257

[email protected]

EEMEA Strategy, Israel

JAPAN ECONOMICS NON-JAPAN (NJA) ECONOMICS

Hiromichi Shirakawa

Head of Japan Economics

81 3 4550 7117

[email protected]

Takashi Shiono

81 3 4550 7189

[email protected]

Dong Tao

Head of NJA Economics

852 2101 7469

[email protected]

China

Robert Prior-Wandesforde

65 6212 3707

[email protected]

Regional, India, Indonesia, Australia

Christiaan Tuntono

852 2101 7409

[email protected]

Hong Kong, Korea, Taiwan

Dr. Santitarn Sathirathai

65 6212 5675

[email protected]

Regional, Malaysia, Thailand

Michael Wan

65 6212 3418

[email protected]

Singapore, Philippines

Weishen Deng

852 2101 7162

[email protected]

China

GLOBAL DEMOGRAPHICS & PENSIONS RESEARCH

Dr. Amlan Roy

Head of Global Demographics

44 20 7888 1501

[email protected]

Sonali Punhani

44 20 7883 4297

[email protected]

Angela Hsieh

44 20 7883 9639

[email protected]

mailto:[email protected]




Disclosure Appendix

Analyst Certification Nilson Teixeira, Leonardo Fonseca, Daniel Lavarda, Iana Ferrao and Paulo Coutinho each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. 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Guide to Brazil Local Markets - Credit Suisse

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