Settlement services - II - Brazil

02.01.2018

Note: Further settlement service information is available at Settlement services - I.

Opening and closing of a Passenger Account by CBL

Customers are advised that CBL may refuse to open a Passenger Account in the name of an entity if this would cause CBL, the Custodian or the Representative to breach any applicable law or regulation.

Customers are advised that CBL might unilaterally decide to close any Passenger Account without prior notice if the Investor holding this Passenger Account is in breach of any Brazilian law or regulation.

Corporate restructuring of the holder of a Passenger Account

Customers are advised and are required to themselves advise their underlying Investors that, if the holder of a Passenger Account is subject to a corporate restructuring, as a consequence of which a different legal entity is the surviving entity (the “Surviving Entity”), it pertains to the Investor to consult with local advisers (including legal advisers) in order to cause the ownership of financial assets and securities of such Investor to be transferred to the Surviving Entity in accordance with Resolution 4.373.

Account opening at CETIP

Corporate bonds are cleared through CETIP. Specific costs apply to open and maintain accounts at CETIP, therefore customers who want to settle trades at CETIP must inform CBL and CBL will request its depository to apply to open an account at CETIP at passenger level.

The costs are as follows:

  • Opening a CETIP account: BRL 1,974.86 per Passenger Account;
  • Re-opening a CETIP account: BRL 678.74;
  • Minimum maintenance fee: BRL 1,350.00 per month.

The monthly maintenance fee varies according to the number of trades executed by the Passenger, as follows:

Trades per monthCost (BRL)Trades per monthCost (BRL)
0-1501,350.001,501-2,00015,000.00
151-3002,500.002,001-3,00018,000.00
301-5005,000.003,001-5,00022,000.00
501-10007,500.005,001-10,00025,000.00
1,001-1,50010,000.00>10,00130,000.00

These costs are charged by CETIP and will be passed on to customers' accounts, on a monthly basis, as out of pocket expenses.

To avoid any unnecessary cost, customers should inform CBL in the account opening request whether they want to open an account at CETIP.

Account opening at SELIC

Government debt securities are cleared through SELIC. Specific costs apply to use and maintain accounts at SELIC, therefore customers who want to settle trades at SELIC  must inform CBL and CBL will request its depository to apply to open an account at SELIC at passenger level.

Custody fees

Average of assets under custody

Fee

Fixed fee a

Up to BRL 20 million0.00050%n/a

From BRL 20 million to BRL 5 billion

0.00035%

BRL 30.00

From BRL 5 billion to BRL 10 billion

0.00023%

BRL 6030.00

Above BRL 10 billion

0.00015%

BRL14,030.00

a. Fixed fee is a fixed charge on top of the average assets under custody.

Settlement transaction fee

BRL 1.00 will be charged for each settlement instruction sent to SELIC.

Conversion of BRL purchase and sale proceeds

BRL is not a freely convertible currency. Under Resolution 4.373, foreign investors must convert a foreign currency into BRL to settle security transactions. Conversion is automatic for BRL purchase proceeds and non-automatic for BRL sale proceeds.

CBL has a standing instruction in place with its depository to fund net BRL cash shortfalls of each Passenger Account. Itaú will calculate the net BRL cash shortfalls for equity investments and fixed income investments separately.

In order to determine the net funding requirement, CBL’s depository will consider the following aspects of each Passenger Account:

  • Its opening BRL balance;
  • Its purchase instructions in government and corporate bonds for same-day value;
  • Its matched pending purchase transactions in equity to be settled in the day (must be matched by 09:00 local time);
  • Its matched pending purchase transactions of the previous settlement days; and
  • The subscription amounts for next-day payment.

Sale transactions (in equities and bonds), cash dividends and interest are taken into account in the opening balance of the following day.

In the case of customer instructions for purchase (RVP) of securities:

  • SD-1 or SD: The customer instruction is entered in the CBL system.
  • SD-1 or SD: The depository provides CBL with the foreign exchange (FX) details related to the customer instruction.
  • CBL will:
    • Post a debit to the customer USD cash account (type 90) for value SD1.
    • Post a credit to the customer BRL cash account for the purchase amount (type 10) for value SD;
    • Post a debit to the customer BRL cash account (type 90) for value SD to deduct any IOF2 that is due on purchases of BRL.

      The customer must ensure the coverage of its USD account accordingly.

In the case of customer instructions for sale (DVP) of securities, there will be no automatic repatriation of the BRL proceeds resulting from a sale of securities. Customers can leave their BRL proceeds in their accounts and reuse them for purchases of securities. CBL depository will always consider the available balance of a Passenger Account before processing a foreign exchange for a purchase of securities.

IOF on short-term investment in government bonds and corporate bonds

In order to avoid short-term trading and encourage longer-term investment in government bonds and corporate bonds, an IOF (Imposto Sobre Operações Financeiras - Financial operation tax) applies on the capital gains whenever a bond is sold within 30 days of the purchase date; the IOF is assessed as the lower of the following:

  • 1% per day over the total amount of the sale amount; or
  • A sliding rate that is applied to the capital gain over the number of days between the investment date and the sale date, as follows:
Regressive Tax Table for levy of IOF
Number of days% Income limitNumber of days% Income limitNumber of days% Income limit
19611632130
29312602226
39013562323
48614532420
58315502516
68016462613
77617432710
8731840286
9701936293
10662033300

Itaú, as CBL’s tax representative, will calculate the applicable IOF upon settlement. CBL will pass this debit on to its customers’ accounts.

Capital gains tax on equities for residents of tax havens

Profits made on equity transactions concluded by residents of tax havens are subject to Capital Gains Tax (CGT).

Itaú, as CBL’s tax representative, will determine the CGT based on the average acquisition price of the security and the selling price. Brazilian legislation allows compensation of gains with losses within the month, this means there will be no tax levied immediately on the sale, only the net is to be compensated at the end of the month.

According to the current tax regulations, CGT for equities must be paid to the Brazilian IRS as follows:

  • For funds repatriated abroad: at the time of the repatriation; or
  • For funds not repatriated abroad: on the last day of the month following the month in which the equities were sold.

Itaú will inform Clearstream of the calculation details of CGT for the trades that generate gains at the time the capital gain tax is debited. Itaú will include the CGT in FX calculations when funds are repatriated abroad or debit the CGT at the end of the following month if funds are not repatriated abroad. CBL will reflect this in its customers accounts.

If a customer sends an instruction to repatriate an amount from a passenger account without considering the CGT to be paid, Itaú will immediately advise CBL of the maximum amount that can be repatriated. Clearstream will in turn immediately advise its customer.

If a passenger account has an insufficient balance to cover the CGT to be paid at the end of the following month, Itaú will process an automatic FX against USD to deduct the BRL amount due. CBL will reflect the FX in the CBL customer's account.

As Brazilian legislation allows compensation of gains with losses within the month, if an initial profit turns into a loss after the profit has been repatriated, the unduly deducted CGT will be converted into a tax credit. This tax credit will be deducted from future CGT due.

Back-to-back processing

Back-to-back processing is not available for transactions in Brazilian securities.

Buy-ins

If shares are not delivered by the seller by 10:00 local time on T+3, CBLC, the local CSD for equities, will issue a “Compulsory stock lending” order to the selling broker. The order can be executed between 10:00 and 10:30 on T+3 or T+4.

CBL will inform customers that the lending process has been activated. The costs will be the sum of the lending rate plus the broker’s rate and CBLC emoluments. Normally, the local broker discounts these costs from the original value trade. CBL will notify customers of the costs as soon as it receives the information.

If the compulsory stock lending order cannot be executed by the local broker, the stock exchange will issue a “Buy-in” order to be executed by the local broker.

If the buy-in is not completed by T+8, the original transaction will be reversed by the stock exchange, in which case, CBL will reverse the transaction in the customer’s account as soon as it receives the information from its depository.

Partial settlement

Partial settlement is allowed for equities.

If the delivering party does not have sufficient shares to deliver, the stock exchange will automatically adjust the financial value of the transaction in proportion to the number of shares actually delivered. Any outstanding shares will be considered as failed and will be subject to the same penalties and buy-in procedures as in the case of an actual fail. The receiving party has no control over this process and does not have the option to decline the partial settlement.

Customers should note the following:

  • Each partial receipt and delivery (against payment) that is settled in CBLC will be booked and credited separately with value SD, either in CBL’s end-of-day processing or at the start of the subsequent real-time processing, depending on when the transactions are settled in CBLC.
  • All partial receipts (against payment) will cause the original receipt instruction to be cancelled. The confirmed securities will be automatically credited and, if applicable, the cash countervalue of the partial receipts will be debited. No new receipt instruction for the remaining unsettled portion of the transaction will be requested. Manual monitoring will be performed until complete settlement of the original receipt instruction.
  • All partial deliveries (against payment) will cause the original delivery instruction to be cancelled. The confirmed securities will be automatically debited and, if applicable, the cash countervalue of the partial deliveries will be credited. No new delivery instruction for the remaining unsettled portion of the transaction will be requested. Manual monitoring will be performed until the complete settlement of the original delivery instruction.
  • CBL will not process an instruction to the Brazilian market if the CBL customer does not have the provision (cash or securities) on its account.

Penalty fees on settlement fails

On 1 October 2013, BM&FBovespa increased penalty fees for settlement failure and introduced a new procedure as follows.

This concerns securities traded on BM&FBovespa, that is, equities.

Details of the procedure

The procedure distinguishes between operational, non-operational (called “naked short-selling” by BMF&Bovespa) and third-party fails.

As a general rule, BM&FBovespa applies a new minimum penalty fee rate of 0.5% on T+3 and 0.5% on T+4 for fails that are not considered to be caused by third-party errors, and a new penalty fee for naked short-selling, as follows:

From
1 October
From
1 November
From
2 December
Delivery failure due to “third-party” failureNo chargeNo chargeNo charge
Delivery failure on T+3 (naked short-selling)0.50%1.00%1.00%
Delivery failure on T+4 (naked short-selling)1.00%5.00%10.00%

A fail that occurs on T+3 and is regularised by the delivery of securities on the morning of T+4 will systematically be considered an operational fail.

Otherwise, for a fail to be considered operational, the participant must send a “request for reconsideration” to BM&FBovespa explaining the situation that caused the fail. The information included must be based on the list provided by BM&FBovespa (Annex 1 to Circular Letter 012/2013), which distinguishes operational fails from non-operational fails. Incorrect or incomplete requests will not be considered by BM&FBovespa.

The request must be sent by the local broker to BM&FBovespa no later than T+6; otherwise, the fail will be considered non-operational (naked short-selling). The customer’s locally appointed broker can act on the customer’s behalf with the request and the follow-up process.

Upon receipt of the request, BM&FBovespa will analyse it as follows:

  • Case A: If the request is approved by BM&FBovespa, the participant will only be charged the minimum penalty fee of 0.5% on T+3 and 0.5% on T+4.
  • Case B: If the request is not approved, BM&FBovespa will inform the local broker of this rejection by T+11. In this case, the fail will be considered non-operational (naked short-selling) and the penalty fee rate will apply as described above on T+12.
  • Case C: If BM&FBovespa does not receive any request for reconsideration, the penalty fee rate applicable to the naked short-selling described above will apply on T+7.

Note: In Cases B. and C. above, BM&FBovespa discounts the penalty fee of 0.5% charged on T+3 and the penalty fee paid on T+4. The broker should pass the fees on to Clearstream Banking customers through CBL’s appointed subcustodian Itaù Unibanco SA. Customers should contact their brokers to obtain further information on how the broker proceeds with this process.

Exception for non-operational fails

With regard to fails not considered as operational, and as an exception to the details of the penalty fee for naked short-selling described above, the following rules and penalty fees applies:

  • A non-operational fail on T+3 resolved on T+4, via the purchase of the security on T+1, with the same trading participant, is subject to 1% penalty fee on T+3.
  • A non-operational fail on T+4 where the participant has purchased the security on the day following the sale (T+1), with a different trading participant, is subject to penalty fees of 1% on T+3 and 0.5% on T+4.

For additional details about the penalty fees, customers are invited to review circular letters issued by BM&FBovespa on their website, as follows:

  • 044/2013-DP Oficio Circular – dated 8 July 2013 (Securities delivery failures and late payment to Clearinghouses fines);
  • 012/2013-DO Oficio Circular – dated 2 August 2013 (Securities delivery failures and late payment to Clearinghouses fines);
  • 056/2013-DP – dated 16 August 2013 (Fines for securities delivery failure and for late payment to the Clearinghouses – effective date delayed).

Penalty fees on late cash payments

BM&FBovespa applies penalty fees for late cash payments in Brazilian Real (BRL).

Penalties levied are a percentage of the cash amount processed late (that is, after BM&FBovespa’s cash deadline) according to the following table:

Time to regularise
Up to 15 minutesBetween 15 minutes and 3 hoursOver 3 hours
Penalty %0.50%0.75%1.00%
Minimum amountBRL 5,000BRL 7,500BRL 10,000
Maximum amountBRL 50,000BRL 100,500BRL 200,000

Note: Penalties will double on recurrences within a 12-month period.

BM&FBovespa charges the broker, who passes the penalty fee on to Clearstream Banking customers through its appointed subcustodian in Brazil, Itaù Unibanco SA.

Management of failed instructions

Instructions in fixed income (settling in CETIP/SELIC) with domestic counterparties that have not settled at the end of the day at the CSD are cancelled automatically. CBL will automatically reverse the transactions that have failed in the local market in its customers’ accounts. However, the automated foreign exchange related to the fixed income transaction will not be reversed and will be accounted in the customer’s account even if the settlement instruction fails.

For instructions in equities (settling in CBLC) with domestic counterparties that have not settled, please refer to “Buy-ins” above.

New issues settlement

For details of the distribution procedure for new issues of Brazilian securities, customers should contact Clearstream Banking Customer Service or their Relationship Officer.

------------------------------------------
1. If SD is a bank holiday in New York, customers must cover their account and will be debited value the New York business day SD-1.
2. IOF = Imposto Sobre Operações Financeiras, Financial Operation Tax. An IOF at a rate of 0.38% applies over all FX inflows used for payment of any fees or taxes.