Circular Letter CVM/SIN 09/2019

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – CEP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

Circular Letter No. 09/2019/CVM/SIN
Rio de Janeiro, September 2, 2019

To
Directors Responsible for the Administration and Management of Investment Funds Subject: Liquidity Management of Investment Funds

Dear Sirs,

Instruction CVM No. 555 establishes, in its Article 91, that the administrator and the manager of an investment fund must, jointly, adopt the policies, procedures, and internal controls necessary so that the liquidity of the fund's portfolio is compatible with (1) the deadlines provided for in the regulations for the payment of redemption requests; and (2) the fulfillment of the fund's obligations.

Furthermore, said policies, practices, and controls must take into account, at a minimum, (i) the liquidity of the assets; (ii) the obligations, including expected margin deposits and other guarantees and unavailability; (iii) the expected redemption values, calculated with consistent and verifiable statistical criteria; and (iv) the degree of dispersion of share ownership, both under ordinary and stressed conditions.

Thus, the objective of this Circular Letter is to provide guidance regarding minimum procedures to be observed within the scope of liquidity management of investment funds when related to structures formed by investment funds in shares ("feeders") that invest exclusively in investment funds ("master") also linked to the same manager ("master-feeder structure").

For the purposes of this Circular Letter, a set of funds under a master-feeder structure shall be considered that which, cumulatively, (1) is managed by the same manager; (2) contains provision, in the investment policy of all feeders, for allocation in shares of the same master fund in a formalized minimum percentage; and (3) that the master fund predominantly holds the feeders as shareholders.

In the case of master-feeder structures, the interpretation of this technical area is that liquidity management can be carried out in an integrated manner, in order to achieve the advantages in liquidity management that the structure may offer.

Clearly, this possibility does not exempt the administrator and the manager from also considering minimal individual characteristics of each investment fund in the structure. Thus, for example, the use of the structure cannot justify the existence of a master fund with a portfolio formed by stocks traded on the exchange and that provides for redemption conditions for D+0 or D+1, for example, because, as is known, the minimum deadline for settlement of this type of financial asset – regardless of its liquidity – occurs only and at a minimum 2 business days after its negotiation.

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – CEP: 20050-901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br

Without prejudice to this, we recognize that good liquidity management practices can be associated with the instrument, such as feeders with more extended redemption deadlines for allocators or large institutional investors in general, for example. In these cases, the stressed redemption scenario to be estimated may and should take into account, of course, this mitigated condition of resource exit from the feeder in question.

Similarly, still regarding the stressed redemption scenarios simulated for the structure, the maximum expected redemption against the master fund should not be that typically expected from a few investor allocators (as one might presume from a more formal view of the structure), but rather, by the liability structure that such feeders may represent from a consolidated perspective, considering, especially, that the entire structure is under the management of the same institution.

In any case, we remind you that the CVM's system for receiving daily liquidity information requires the individual submission of both expected cash outflows and available liquidity for each of the funds involved in the structure. In this sense, since the calculation performed in a consolidated manner will generate only one information about the portfolio liquidity (in this case, referring to the liquidity of the master's portfolio); and also, only one information about the expected cash outflows (here, in a consolidated manner considering all feeders); both the portfolio liquidity information and the expected cash outflow information for the entire structure must be replicated in identical terms for the daily information of all funds that compose it.

Sincerely,

Digitally signed by
DANIEL WALTER MAEDA BERNARDO
Superintendent of Institutional Investor Relations