Brazil’s brokerage firm XP Investimentos, one of the leading distributors in of the country’s structured investment products market, has launched Banco XP after receiving an operational license by Banco Central do Brasil in October.

The new entity is now licensed to operate as a multi-purpose bank, and carry out commercial banking and investment activities. The authorisation comes after the Brazilian monetary authority gave the green light to the brokerage firm to develop its own bank in December last year.

Banco XP will break away from traditional banking to provide customers with loans guaranteed by investments to avoid the redemption of funds before maturity.

”We want to be one of the issuers of the certificado de operações estruturadas [COE] market,” said Maite Kattar (pictured), head of COE at XP Investimentos, adding “XP will continue to have an open platform with COEs from third party issuers. Banco XP will be one of them.”

We will try to offer shorter term products and promote a better secondary market for all COEs XP

 Banco XP’s initial focus will be on reverse convertibles and participation notes, according to Kattar.

”We will try to offer shorter term products and promote a better secondary market for all COEs XP,” she said, adding that the main challenges to make this kind of product more appealing to non-sophisticated investors are “liquidity and tenor”.

“[This is a challenge] not only for COEs XP, but for all COEs in Brazil.“

The first structured products issued by Banco XP and distributed by XP Investimentos are already open for subscription via the broker’s distribution channels. They include the XP Reverse Convertible Amazon - 2 anos -a two-year reverse convertible COE linked to the Amazon share which will pay a 13% coupon at maturity if the underlying is at or above 70% of its initial value; and the XP S&P 500 Bidirecional 5 anos - a five-year fully protected shark fin/bull bear structure linked to the S&P 500 index which is targeted at investors with bull-bear market sentiment.

The instruments distributed by XP Investimentos and issued by Banco XP will feature payoffs already used by active issuers in the market, said Kattar.

The Brazilian market has been dominated by foreign issuers, according to SRP data. From a payoff perspective, capped and uncapped calls topped the list representing almost 50% of the total number of investments throughout the year, however the highest selling payoffs were knockout/snowball/worst of (133 products/US$2.2 billion) enhanced trackers (41 products/US$1.7 billion) and enhanced tracker/uncapped call (25 products/US$1.1 billion).

Banco XP is entering a highly competitive structured products market that has evolved over the last three years from a plain vanilla set up dominated by local banks to a ‘very different and competitive’ market dominated by foreign investment banks, according to Fabio Zenaro, director of product desk, commodities and new business at Brazilian stock exchange operator B3.

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

Following the launch of Banco XP, Guilherme Benchimol, founder and CEO of XP Investimentos, said the bank will bring higher competition to the market and offer the cheapest credit in Brazil.