CIRCULAR LETTER/CVM/SIN/SNC No. 01/2013

Rio de Janeiro, February 5, 2013

Subject: Clarifications on provisions of CVM Instruction No. 489/11 (“ICVM 489”).

Dear Sirs,

This Circular Letter aims to guide administrators of FIDC, FIC-FIC, FIDC-PIPS, and FIDC-NP (collectively “FIDC”) in the application of certain provisions of ICVM 489 and in filling out the Monthly Report referred to in Annex A of said Instruction.

We clarify that part of the guidance described in this Circular was the subject of debate at an event held by ANBIMA in Rio de Janeiro on October 4, 2012, with participation from representatives of the entity, FIDC administrators, and the CVM, where doubts regarding the application of certain provisions of ICVM 489 were discussed and clarified.

We emphasize, finally, that this Circular Letter does not exhaustively address all provisions of ICVM 489, thus not dispensing with the reading and examination, by administrators, of said Instruction, complemented by the Explanatory Note to ICVM 489 and by Circular Letters CVM/SIN No. 4/2011, CVM/SNC/SIN No. 1/2011, and CVM/SIN/SNC No. 1/2012, as well as the update of CVM regulations, especially those issued after this date.

Content

1. Considerations on the classification of credit rights operations as “without substantial acquisition of risks and benefits”
2. Recognition and measurement of credit rights
3. Write-off of credit operations
4. Provision for losses due to reduction in recoverable value
   4.1 Considerations on expected losses (Chapter III of ICVM 489)
   4.2 Calculation of provision for asset groups (art. 15, §3º, of ICVM 489)
5. Filling out the Monthly Report – Annex A of ICVM 489
   5.1 Table I, item “b” – Credit Rights without Substantial Acquisition of Risks and Benefits
   5.2 Table II, item “d.2” – Public Services
   5.3 Table II, items “f.6” and “f.7” – Corporate and Residential Real Estate Portfolio
   5.4 Table IV - Average Net Equity (last three months)
   5.5 Tables V and VI – Portfolio Behavior – Maturity Dates
   5.6 Table VII – Transactions with Credit Rights
   5.7 Table VIII – List of Amounts Due from the 25 Largest Debtors
   5.8 Table IX – Rates Practiced in Transactions with Credit Rights
   5.9 Table X, item 3 – Yield Calculated in the Month
   5.10 Table X – Senior Shares
   5.11 Table X - Liquidity (mandatory filling only for open-ended funds)
   5.12 Registration of shares to be issued
6. Financial Statements – Art. 17, XII, of ICVM 489

1. Considerations on the classification of credit rights operations as “without substantial acquisition of risks and benefits”

Regarding the classification provided for in art. 3º, II, of ICVM 489, it should be observed that §2º of the same article brings a non-exhaustive list of examples for the classification of operations as “without substantial acquisition of risks and benefits”, and there may be other events, with the administrator defining the classification of the portfolio in the most appropriate manner, based on consistent and verifiable criteria, which must be analyzed and validated by the auditor.

We highlight that when classifying operations as “without substantial acquisition of risks and benefits”, it is also necessary to evaluate the need to record a provision for losses according to the risk of the guarantor and related parties, analyzing, including, the guarantees involved, such as insurance contracting, co-obligation, and the level of subordination offered by the guarantor vis-à-vis expected losses. Cases of deterioration of guarantees may lead to the total or partial transfer of operations to the category of “with substantial acquisition of risks and benefits”.

Thus, the same FIDC may present operations with credit rights classified in the two categories provided for in art. 3º of ICVM 489. The FIDC may, in fact, present a portion of the same operation classified under the terms of item I of this article and another portion classified under the terms of item II of the same article.

The auditor must carry out audit procedures deemed adequate to ensure that the classifications of operations were carried out correctly, in a coherent and consistent manner, as well as their respective provisions for losses.

We also remind that other clarifications regarding the total or partial classification of operations in the different categories are contained in the Explanatory Note to ICVM 489.

2. Recognition and measurement of credit rights

The Explanatory Note to ICVM 489, in its chapter 2, clarifies the procedures to be adopted in the recognition and measurement of credit rights, which must observe the provisions of Pronouncements CPC 38, 39, and 40. Thus, the fund must classify its financial assets as: (i) measured at fair value through profit or loss; (ii) loans and receivables; or (iii) held to maturity. It is worth highlighting that the “available for sale” category is not applicable to investment funds.

In this context, credit rights without a maturity date, such as precatórios and defaulted credits, must be classified as “measured at fair value through profit or loss”.

The methodology for calculating the fair value of these rights is the responsibility of the administration and must be based on the constant updating of estimates and assumptions used to calculate their acquisition value, such as: interest rates, maturity dates, collection risks, collection stages, etc., following the provisions of Technical Pronouncement CPC 46 of the Accounting Pronouncements Committee, which deals with the measurement of fair value, approved by CVM Deliberation No. 699, of December 20, 2012.

3. Write-off of credit operations

ICVM 489 does not provide details on deadlines and conditions for the administrator to perform the write-off of operations in the portfolio. The objective is to allow administrators to define, for each FIDC, the applicable methodology to perform the write-off of these operations, considering each credit operation or each type of operation. There is no predefined deadline for the write-off, and the procedures must be guided by situations in which the administrator no longer expects to receive anything from the credit rights and in which, in its analysis, all possible mechanisms for recovery have been exhausted.

Credits eventually recovered after their respective write-off must be recognized in the asset in counterpart to an appropriate profit and loss account, as recovery of expenses.

We emphasize that the amount recovered in the fiscal year and the methodology adopted for the write-off must be disclosed in the explanatory notes to the financial statements of FIDCs.

4. Provision for losses due to reduction in recoverable value

4.1 Considerations on expected losses (Chapter III of ICVM 489)

The provision for losses calculated in accordance with ICVM 489 must always be based on expected losses and may result in amounts lower or higher than those recorded prior to the adoption of the Instruction, such as that calculated through the provisions of CMN Resolution No. 2682/99. The difference found, whether positive or negative, must impact the result of the fund’s fiscal year in the initial period of adoption of ICVM 489.

It is worth noting that some provisions of CMN Resolution No. 2682/99 are no longer applicable due to the provisions of ICVM 489, such as recognizing the provision at the time of acquisition of the credit. At the moment the fund acquires the credit asset for a certain value, it is understood that the administration believes it will receive back a value that allows unitholders to obtain at least the expected rate of return; otherwise, it would not make the operation. The constitution of the provision must therefore occur only when, at a later moment, there is evidence of a reduction in the recoverable value of the assets relative to what was expected at the initial moment.

The net book value of provisions must be represented by the expected cash flow for the respective operations discounted to present value by the applicable rates, as determined in Art. 12 of CVM Instruction 489/11.

However, some of the criteria set forth in CMN Resolution No. 2682/99 may, exceptionally, be applied, if they are aligned with the provisions of ICVM 489.

Among others, it is the responsibility of the administrator:

(i) Establish policies that define the events considered “evidence of reduction in the recoverable value of assets” - According to Art. 11 of CVM Instruction 489/11, “Whenever there is evidence of reduction in the recoverable value of the fund’s assets, evaluated at cost or amortized cost, a provision for losses must be recorded”. Such evidence is not always identifiable, meaning that the operation does not need to be overdue or the debtor in bankruptcy proceedings for a provision to exist. Evidence of reduction in the recoverable value of assets can also be verified through analysis of historical data for credits with similar risk characteristics, or through the deterioration of the debtor’s risk classification, as well as by other factors, which must be defined by the administrator and validated by the auditor, according to the characteristics of their credit assets.

(ii) Monitor the effectiveness of the established methodology, through comparison of past provisions with the loss history (net of recoveries) and make necessary adjustments to ensure that the methodology used always represents the best estimate of the administration based on the provisions of ICVM 489.

(iii) Consider in its risk analyses the information made available by assignors regarding common debtors.

We highlight that the provision calculation methodology must be adequately disclosed in the explanatory notes.

4.2 Calculation of provision for asset groups (art. 15, §3º, of ICVM 489)

In cases of FIDCs with diversified credit portfolios, the referenced article allows for the evaluation of credit risk for groups of assets, instead of individually. We emphasize that the risk must be evaluated for the debtors or the assignors, depending on who bears the credit risk.

This same article provides for the factors that must be considered to group assets. When evaluating credit risk for the group, the administrator must consider these factors, possibly combining them with other analyses, such as the use of sampling techniques to estimate the risk of the sample, provided that the samples represent the total population, or another technique that the administrator deems adequate for the evaluation of credit risk of a certain group.

For expected cash flows measured by groups of assets, the assets of each group must have similar credit risk characteristics, as provided for in Art. 15, §3 of ICVM 489/11. That is, all those assets whose expected cash flows are measured by the same loss percentage must have the same credit risk, considering factors such as economic activity, type of guarantee, history of default, current default, among others. The same operation or debtor may change groups from one period to another if the considered risk characteristics change (e.g.: the debtor moves from one delay band to another, the economic sector where the debtor operates is in crisis, etc.).

We highlight that the provision methodology, including relevant information on asset grouping for risk assessment, must be adequately disclosed in the explanatory notes.

5. Filling out the Monthly Report – Annex A of ICVM 489

5.1 Table I, item “b” – Credit Rights without Substantial Acquisition of Risks and Benefits

If the provision for losses of credit rights classified in the category “without substantial acquisition of risks and benefits” is accounted for, as explained in Item 1 of this Circular, the value of credit rights classified in this category must be reported net of the respective provision, until a specific field is created by the CVM.

5.2 Table II, item “d.2” – Public Services

What does not qualify as “public services” (electricity, telephony, transport, and sanitation, etc.) must be presented as “services” in item “d.1”. For adequate classification, the credit right must be evaluated, not the assignor.

5.3 Table II, items “f.6” and “f.7” – Corporate and Residential Real Estate Portfolio

The credit right must be analyzed, not the assignor or the borrower, to perform adequate classification, and in this sense, the corporate real estate portfolio must reflect credits granted for commercial ventures. The residential real estate portfolio must reflect credits granted for residential real estate financing.

5.4 Table IV - Average Net Equity (last three months)

For the calculation of average net equity, the arithmetic mean of the last three net equities disclosed at the end of each month must be calculated.

5.5 Tables V and VI – Portfolio Behavior – Maturity Dates

Credit rights classified as “performing” shall report maturity dates according to the administration’s best estimate for their collection.

Credit rights that have a maturity date at the end of a certain month and that have been paid within the deadline, but for collection reasons, have not yet been adequately identified on the last business day of the month, shall be “written off” when the debtor is identified, thus retroactively adjusting the accounting of that month with the appropriate reflections in the Monthly Report. Any retroactive accounting adjustment to the month of competence must be reflected in the Monthly Report of the respective month.

We highlight that item “c” of Tables V and VI refers to credit rights prepaid by the debtors, thus not being confused with repurchases or substitutions to be reported in Table VII.

5.6 Table VII – Transactions with Credit Rights

Regarding items “c” and “d” of this table, we clarify that the substitution of credit rights refers to cases of exchange of said rights, without any financial transaction involved. Consequently, we understand repurchases as cases where the assignor purchases the credit rights held by the fund, involving a financial transaction.

We clarify that if the assignor substitutes a credit right with another of lower amount and transfers to the fund financial resources corresponding to the value difference, a portion should be reported as substitution and the other as repurchase.

5.7 Table VIII – List of Amounts Due from the 25 Largest Debtors

While the form is not adapted to accept “blank” fields, in the case of FIC-FIDC, it is recommended that the administrator fill the field with CNPJ 9999999 (fourteen digits) for the unidentified debtor/debtor.

5.8 Table IX – Rates Practiced in Transactions with Credit Rights

Discount rates refer to the internal rates of return (“IRR”) of acquired assets and that are being used to appreciate these assets, that is, they refer to the IRR for the fund.

Interest rates correspond to the original rates of the financial assets prior to their acquisition by the fund, that is, the original IRR of the financial asset.

All rates, whether discount or interest, must be reported on an annual basis.

5.9 Table X, item 3 – Yield Calculated in the Month

We emphasize that the monthly yield of senior and subordinated shares, reported in this field, must be that calculated without considering any effect produced by the amortizations of the respective month on the fund’s net equity. When calculating the month’s yield, the administrator must divide the current month’s result (fund’s net profit) by the net equity of the immediately preceding month. It is worth noting that this previous equity will be presented net of amortizations made up to that month.

See below illustrative example:

	Jan/X1	Feb/X1	Mar/X1
Initial Net Equity	R$110	R$115
Initial Application	R$100	-	-
Month Amortizations	(R$10)	(R$5)	(R$10)
Month Net Profit	R$20	R$10	R$20
Final Net Equity	R$110	R$115	R$125
Month Yield	R$20 / R$100 = 20%	R$10/R$110 = 9,09%	R$20/R$115 = 17,39%

5.10 Table X – Senior Shares

If the fund has different series of senior shares, there is no field to open such information in the monthly report, and thus, the number of senior unitholders and the yield of all series must be presented in a consolidated manner until specific fields are created. With reference to the benchmark of each series, we suggest that a weighted average of the benchmarks of all senior share series be calculated.

5.11 Table X - Liquidity (mandatory filling only for open-ended funds)

Open-ended funds are required to fill out this field; closed-ended funds may send this information, if they wish.

5.12 Registration of shares to be issued

While a specific field is not created, resources from applications that will be converted into a quantity of shares in the future must be registered as “values to be paid” in Table III, “a”, as this constitutes a future capital increase.

6. Financial Statements – Art. 17, XII, of ICVM 489

This provision requires, among other information, disclosure in explanatory notes, for the overdue portfolio, of the value of the stock of the same debtor and the criterion for measuring the impact on the installments to mature relative to the same debtor in other operations.

We understand that for credit operations with diversified debtors, such as CDC, credit cards, payroll-deducted loans, and others, debtors may be grouped by type of credit operation, with total and average values disclosed for each group.

The opening by debtor or the adequate level of grouping must be determined by the administration, considering the materiality of the disclosure for the fund and the impact on the installments to mature of the same debtor.

Sincerely,

(Signed Original)

Francisco José Bastos Santos

Paulo Roberto Gonçalves Ferreira

Superintendent of Institutional Investor Relations

Superintendent of Accounting Standards and Audit – Acting