Circular Letter CVM/SIN 11/20: Guidance on Operations with Funding Instruments Linked to Active Operations (CDBV, LFV, and LCIV)

SECURITIES COMMISSION BOARD
Rua Sete de Setembro, 111/2-5th and 23-34th Floors – Center – Rio de Janeiro - RJ – ZIP Code: 20050- 901 – Brazil Tel.: (21) 3554-8686 - www.cvm.gov.br Circular Letter No. 11/2020/CVM/SIN Rio de Janeiro, August 20, 2020

To Administrators of Investment Funds regulated by CVM Instruction 555 (“IF”) Subject: Guidelines regarding operations with funding instruments linked to active operations (CDBV, LFV, and LCIV), issued in the form of Resolution No. 2,921, of the National Monetary Council

Dear Sirs,

1. This Circular Letter aims to guide administrators of investment funds regulated by CVM Instruction No. 555 with applications in assets linked to active operations, such as CDBV, LFV, and LCIV, regarding their correct treatment in terms of pricing, due diligence in acquisition, classification, and transparency.

2. As is known, such assets possess specific credit risk characteristics due to their issuance conditions, as established by Resolution No. 2,921, of the National Monetary Council.

3. Thus, in the manner of calculating the credit spread, for the purpose of pricing these assets, the administrator must consider not only the credit risk of the issuer of the CDBV/LFV/LCIV, but also necessarily the credit risk of the debtor of the linked operation (adopting, thus, the concept of “weakest link”), since Res. 2,921 of the CMN defines the formal transfer of the credit risk of the debtor of the active operation to the holder of the CDBV/LFV/LCIV.

4. On the other hand, the due diligence for the acquisition of this type of asset carried out by the fund manager should resemble those that would apply to private credit assets, highlighting in this aspect the need to evaluate the quality of credit not only of the issuer of the asset, but also of the credit risk of the debtors of the linked operations. In this aspect, even if the administrator itself is involved in the structuring of the CDBV/LFV/LCIV, and sometimes even as the issuer of said asset, it must carry out its due diligence in an impartial and independent manner, in accordance with the principles of segregation of the manager’s activities in relation to the issuer or structurer of the asset.

5. Regarding the concentration limits per issuer and per financial asset modality applicable to the investing fund, administrators must compute the amount invested in assets of this category both in the calculation of the concentration limits applicable to the issuer of the CDBV/LFV/LCIV and also in those calculated on the debtors of the linked active operations.

6. Finally, regarding the informational aspect, with notable emphasis on the information provided in the monthly CDA document (Composition and Diversification of Applications), this technical area informs that it has made available new types of assets in the XML file for sending via CVMWeb, according to the table below:

Deposits in financial institutions
84 Linked CDB
85 Linked LFV
86 Linked LCI

We request that, from this date, such assets be reported using these new asset types, with the linked active operation described in the available text field, including the code of the specific linked asset and its maturity date, if any.
We request that, for this purpose, a description of the type “asset linked to CCB999999, issued by [Issuer] with maturity on dd/mm/yyyy” be used.

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