Circular Letter CVM/SIN 02/2010

CIRCULAR LETTER/CVM/SIN/ No. 02/2010
Subject: Recommended procedures when acquiring Bank Credit Notes - CCBs.

Dear Sirs,

This Circular Letter aims to guide administrators of investment funds regulated by CVM Instruction No. 409/04 regarding the minimum recommended procedures in operations involving Bank Credit Notes - CCBs.

Several factors have led to an expansion of CCB allocation in investment funds regulated by CVM Instruction No. 409/04. In view of the risks inherent to these assets, this Commission considers it necessary to dedicate special attention to the supervision of practices adopted by participants involved in their acquisition.

CCBs thus require specific knowledge on the part of managers and administrators who trade them, as well as the adoption of specific procedures for risk management. Only in this way can the duty of diligence established in Item I of Article 65A of CVM Instruction No. 409/04 be considered fulfilled.

It should be noted that, in the understanding of this Superintendence, the aforementioned duty of diligence implies, at a minimum, the adoption of consistent, objective, and verifiable practices, which are sufficient not only to understand and price the risks associated with invested assets, but also to guarantee an acceptable standard of internal controls and management of operational, market, liquidity, and credit risks associated with the management of third-party resources. These practices must be coherent with the risks assumed in each of the markets in which one is operating.

In this sense, after analyzing the practices adopted by several fund administrators who invest in CCBs, this technical area compiled a set of procedures observed by most managers, which exemplify, in our understanding, the ways of complying with the standard when trading with CCBs. The recommendations now presented, based on those market practices, were also strongly inspired by Opinion No. 11/08 of ANDIMA (now ANBIMA).

Thus, once formalized internally and adopted by administrators and managers, the following practices would, in principle, be considered by this Superintendence capable of meeting the duty of diligence provided for in Item I of Article 65A of CVM Instruction No. 409/04:

1. Only acquire CCBs if access to the information produced by the original creditor's credit analysis area has been guaranteed, as well as the provision of other information deemed necessary regarding the operation represented by the CCB and its respective issuer;
2. Evaluate the adequacy of the CCB to the fund's investment policy and its target audience;
3. Have in its structure, or hire specialized professionals in the legal, credit, compliance, and risk analysis of CCB operations, which allow for the evaluation of the debtor and the monitoring of the instrument after its acquisition. In this regard, we understand that the rating of the asset or issuer, provided by a credit rating agency, when available, can also be used as additional information to the assessment of the respective credit risk and other risks to be proceeded with, and not as a sufficient condition for its acquisition. In this case, the higher volatility to which the risk classification of structured assets is subject, relative to traditional corporate bonds, must be considered in the analysis for decision-making;
4. Require access to the documents comprising the CCB or accessory to it, and in operations with real guarantee or suretyship, the description of the conditions applicable to their access and execution, as well as the formalization of any restrictions on the exercise of rights;
5. Gather, in operations involving related third parties, additional documentation to prove that the transaction was carried out on an equitable basis;
6. Periodically renew, while the asset remains in the fund's portfolio, the evaluations of the credit risk involved in the operation, as well as the quality and capacity for execution of the guarantees;
7. Verify if the note has been endorsed to CETIP in the manner provided for in Article 35, Item VII, of the "Regulation of Participant Access, Admission of Asset, Trading, Operation Registration, Electronic Custody and Settlement", before acquiring a CCB in the CETIP S.A. system - Organized Asset and Derivatives Market; and
8. Acquire only CCBs from debtor companies whose financial statements have been audited by an independent auditor.

The set of procedures above is of an exemplary nature. Thus, in concrete cases, other practices may be adopted, always duly motivated, in view of the nature of the existing risks. Similarly, even the adoption of the described procedures must be subject to periodic re-evaluation, in view of their adequacy for the purposes referred to above.

Sincerely,

Signed original by
FRANCISCO JOSÉ BASTOS SANTOS
Superintendent of Institutional Investor Relations