The implementation of the public distribution of structured notes (certificados de operaçoes estruturadas - COE) in Brazil has resulted in the first thousand transactions through financial intermediaries, according to the Central de Custódia e de Liquidação Financeira de Títulos (Cetip), the clearing house authorised by the Central Bank of Brazil and the CVM to keep a register of the COE market.
According to Cetip, there are two independent distributors already in the COE market including XP investimentos and Easynvest. XP Investimentos entered the market in February with a structured note linked to the Ibovespa index while Easynvest also marketed its first COE in March. Cetip also reported that the overall amount invested in COEs has reached R$8.5bn (US$2.4bn).
XP Investimentos has marketed three COEs so far including one hedged by Morgan Stanley, a R$8.6m principal protected straddle double knockout note linked to Ibovespa with one-year knock out barriers set at -17% and +31,5%, as well as a one-year R$7.12m call spread USD/BRL principal-protected note (PPN) with 146% participation capped at 126.28%, and a six-month R$3m call spread USD/BRL structure with 119% participation capped at 111.90%, both hedged by Banco ABC Brasil.
XP Investimentos is planning to sell more than R$700m in COEs to Brazilian retail investors in 2016, and is expecting significant market growth as a result of the new public distribution rules "allowing broker dealers to distribute the notes", according to Maria Tereza Kattar, marketing and distribution for COEs at XP Investimentos.
"94% of the products are principal protected COEs, [and] we need to make sure that the product is attractive enough to beat the high interest rates in Brazil, now at 14,25%," said Kattar. "Although independent distributors were not allowed to sell structured notes, retail banks have been able to sell R$8bn in COEs between 2014 and 2015. [We see] a lot of demand at the moment for USD/BRL and inflation linked products. 40% of the notes issued are inflation linked products."
According to Fábio Zenaro (pictured), superintendent of products and business Cetip, the COE market continues to grow "consistently and robustly", and with the introduction of the rules for public distribution, the trend is for the "consolidation of this investment product" because "COEs are flexible and can be suited to different investor profiles and economic scenarios".
In January 2016, the COE completed two years in the Brazilian market. At the end of 2015, assets under management in the COE market stood at R$7.7bn, doubling the amount reached in 2014 (R$3.8bn), a 39% increase year on year.
Zenaro said that Cetip will continue to provide tools to keep end investors informed about the offering of third party distributors.
COEs have exceeded all initial expectations and sales in its second year of existence with 17 banks active in the segment involved in a total of 74,143 COE transactions in 2015. Most transactions (91.7%) involved investors in the individual category, followed by non-financial corporates (8.2%) and institutional investors (0.1%). Of the total volume sold in 2015, COEs with protected nominal value represented 93.6% of the total issuance.
In terms of asset classes, FX-linked products lead the issuance (35.3%), followed by price indices (20.3%) and national equity indices (20.2%). The remaining issuance was dominated by international equity indices (12.6%), interest rates (6.5%), baskets of indices (3.5%), single domestic shares (1.12%) and international shares (0.43%). In 2015, the average ticket for each COE was R$87,500 for individual investors, US$1.5m for institutional investors and R$436,000 for non-financial corporations.
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