Nora Rachman
Securities Expert
Post-Doctoral Fellow
Sao Paulo Law School - Fundação Getulio Vargas, Brazil
November 2013
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Introduction
Specific approach of ABS legal framework:
categories of assets
 Export assets
 Agribusiness
 Real state
 Finance
 Other corporate assets
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Practice
Questions to future work
Securities
Assignment
Creditor
Assets /
services
$
Credits
Debtors
SPE
$
Investors
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No unified regulation
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Targeted to specific categories of assets
 Export assets
 Agribusiness
 Real state
 Finance
 Other corporate assets
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Well established and common mechanism
but restricted to large-sized corporations.
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Cross-border issuance of securities:
 no definition on structure to be used,
 trust as SPE
 securities issued are trust certificates
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The introduction of specific securities for
agribusiness securitization in Brazil aims to
foster investments and finance businesses
related to agricultural products, by-products,
and waste of economic value.
The launching platform of securitization
in Brazil
 Evolution with different rules and
formats:
 1) Mutual investment funds (via real
estate investment funds)
 2) Securitization of receivables (via
securitization companies or via FDIC)
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1997: CRI - certificates of real estate
receivables. Real estate securitization
companies as the securitization vehicles.
Low volume of securities due to:
 lack of knowledge within the local investor
community as to how to analyze and price assetbacked securities.
 Lack of standardized financing documents among
originators.
 Need to incentivate a secondary market of CRIs
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2001 – Creation of the receivables investment fund
(FIDC): investment funds regulated by CVM.
Managed by financial institutions
FIDC must invest at least 50% of its assets in credit
rights or instruments representing such rights.
Qualifying assets: financial, commercial and
industrial sectors.
Only qualified investors, as defined by CVM, can buy
securities from these funds.
A relatively straight-forward registration process for
public offerings of securities issued by these funds,
A large, well-established and highly disseminated
fund industry.
Credits and other assets of the portfolio shall be
kept in custody
 Shares may be traded on the secondary market
 Further regulation: increased disclosure of
information, definition of third party
responsibilities, portfolio composition and
concentration limits.
 Funds cannot enter into bankruptcy, thus
mitigating issuer risk. (court tested)
 They cannot issue or contract debt.
 High level of tax efficiency
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Financial institutions are the originators,
who assign their credits to securitization
companies, which in turn issue securities
backed by these receivables
An important provision is the assignor’s
joint liability for the payment of receivables.
Concerns of Central Banks:
 capital requirements
 more off-the balance assets
Combination of legal instruments
 assignment of credits and
 issuance of securities.
Mostly used:
 negotiable instruments from retail
sales, revenue from services, credit card
invoices, receivables from the
automotive sector and commercial
aviation .
Fraud allegations at Banco Cruzeiro do Sul:
allegation of capital shortfall and suspicions
of using FDICs to inflate assets. This is
currently being investigated
 Breach of obligations related to the FDIC
management (including custody services)
 Sale of FDIC shares to non-qualified
investors
 Irregularity in the opinion of FDIC
independent auditors
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Broad principles of civil law x importance of specific
regulation (by type of asset)
1) Real estate financing: legislation contributes to the
development of the real estate market, and at the same time
to the creation of secondary trading of securities issued in
these processes.
2) Banking securitization: legislation does not target the
development, but the controlled use of this type of
operation.
Market regulation x development
1) development of securitization in each country depends
less on the law that governs the operation internally and
more on the degree of development of its capital market.
2) Use of available mechanisms available in Law have bigger
impact than the creation of new statutes.
What is the legal nature of securities issued?
How to enable a single model for the effectiveness
of the assignment of receivables?
 It is feasible to require mandatory rating?
Considering that the over-reliance on credit ratings
has been one of the factors cited as contributing to
the global financial crisis, should we replace them
with alternative standards? Which ones?
 When it comes to financial conglomerates, there
may be a potential conflict of interests due to the
proximity between the bank institution (issuer of
securities) and the fund managers? How can the
interests of the fund and its shareholders be
preserved?
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nora.rachman@gmail.com