Brazil cuts inflation target for first time in over a decade

Brazil’s government on June 29 lowered its annual inflation target for the first time in more than a decade, seeking to turn the page on recent double-digit jumps in consumer prices and bolster investors’ confidence about future economic stability.

The National Monetary Council, comprised of heads of the finance and planning ministries and the central bank, cut the inflation target to 4.25 percent in 2019 and 4.00 percent the following year, from 4.5 percent at present.

The tolerance range was maintained at 1.5 percentage point.

The reduction, predicted by a poll of economists in January, followed a plunge in annual inflation from nearly 11 percent in early 2016 to 3.6 percent in June.

A stronger commitment to low inflation could boost Brazil’s long-term growth by reducing investor uncertainty, without closing the door to further interest rate cuts by the central bank this year, economists said.

Economists forecast an inflation rate of 3.5 percent for 2017, breaking a sequence of seven straight years of Brazil overshooting its target. Under the administration of former President Dilma Rousseff, who was impeached last year, economists accused policymakers of pursuing the ceiling of the goal and not its midpoint in order to avoid rate hikes that could hurt growth.

“Economic policy has all the necessary conditions in terms of inflation, transparency and credibility to remain committed to these inflation targets,” central bank chief Ilan Goldfajn told journalists.

Yields on longer-dated interest rate futures slipped in early trading, suggesting investors saw the new targets as consistent with forecasts of interest rate cuts. Global risk aversion pushed yields up again later in the day, traders said.

Growing investor optimism about Brazil’s economic prospects contrasts with an escalating political crisis that threatens to remove President Michel Temer from office.

Goldfajn said the targets took into account the political environment, and also responded affirmatively when asked if he expected to stay in his post even if Temer is suspended from office should the Supreme Court try him on corruption charges. Temer appointed Goldfajn to lead the central bank last year.

The central bank has been expected to cut its benchmark rate to 8.5 percent by December, from 10.25 percent currently, according to a central bank survey of economists released on Monday. The bank has already lowered the benchmark rate by 400 basis points since October.

Before the decision was announced, economists had been forecasting an annual inflation rate of 4.25 percent for the years of 2019, 2020 and 2021, according to the central bank.

Brazil began targeting inflation in 1999, with the 4.5 percent target being first adopted for 2005.

Goldfajn had long said Brazil should aim for a target more in line with other emerging markets. Latin American countries such as Mexico and Chile target inflation at 3 percent.

Source: Reuters Brazil

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Meirelles sees lower growth and doesn’t rule out tax hikes

In a scenario in which the economy’s recovery may be more modest than expected, raising taxes to settle the government accounts is back in the agenda. On June 28, during engagements with the financial sector in São Paulo, Finance Minister Henrique Meirelles admitted that the economic team would revise downwards the current forecast of economic growth in 2017, now at 0.5%. A little before, the minister had said the government had not taken decision on hiking the Cide tax on fuels. He stressed, however, that he had never denied the possibility of raising taxes to settle accounts.

“For now, there is no decision yet on increasing the Cide,” Mr. Meirelles said after attending a Citibank event in São Paulo. “We have always said we would raise taxes if necessary and I repeat that now in a more pertinent way.”

A Cide hike, measure always recalled at the moment of increasing revenues, gained attention again because of the government’s budget difficulties, which demand extra revenues for compliance with this year’s fiscal target, of R$139 billion. Although the economic team considers raising the tax burden, Mr. Meirelles also said that tax collection should recover and “even surprise positively, especially from the second half.”

Mr. Meirelles said that at some moment tax receipts are likely to recover and “even surprise positively.” He pointed out that the government expected the passage of the bill that clears a little more than R$8 billion in court-ordered payments whose recipients have not withdrawn the money, and that there were other important measures to raise revenues. The minister expects a recovery in tax receipts particularly in the second half.

He once again said that the pension reform is a long-term measure and that the delay of a few months in its passage “will not define the long-term fiscal situation,” but that the reform can’t wait years to be done.

About the downward revision in the official growth projection for this year, the minister declined to provide a figure, but advanced that the current forecast of 0.5% will be recalculated. “It will be a little lower than that, but will certainly be positive, it will be in that range between 0% and 0.5%. We will announce it in the next few weeks,” he said.

Mr. Meirelles argued that he would prefer working with the comparison of economic growth between the last quarter of this year and the last quarter of 2016, whose projection of the Finance Ministry was around 2.7%. The minister also said that this figure would be revised downwards. “We still maintain a projection of growth above 2% in the last quarter of this year from the last quarter of 2016. We’ve come up at a certain point with 2.7%, didn’t change that projection formally, but in fact it has a certain downward bias, but it is not something that will be below 2%, it will be higher. Anything between 2% and 2.7% is what we are evaluating,” he added.

When commenting the economy’s numbers, the minister made the point of associating them with positive data, which he classified as recovery of growth. “There are crucial points for the economic stimulus: the labor market began improving, unemployment stopped rising in the sense that there has already been positive creation. Even though it is not a strong number, it shows some recovery. There is also inflation falling without prospect of reversal, allowing the monetary authority to give more stimulus to the economy. Therefore, there is a series of economic factors that support the trajectory of growth we expect, but with some adjustment.”

Despite acknowledging that the political crisis hinders the progress of economic reforms proposed by the economic team, Mr. Meirelles said he will continue in the government. “I don’t think of leaving the government, I am focused on my work. My agenda is economic, it is not a political agenda, I do exactly the part of a technical team, with economic focus and that has total freedom to work. We are proceeding with our work normally. The economy is doing well, showing results, from the point of view of economic activity,” he said.

Regarding the current political scenario, the minister argued that the market is more focused on the medium term. “Investors see a consensus situation that the reforms are crucial and that this economic program is the most adequate, but increasingly they begin looking to the electoral matter of 2018. [They wonder] How will the government be in 2019? What will be the prospects? This begins to influence market signals,” Mr. Meirelles said, once again denying he has interest in running for president next year.

Source: Valor Econômico

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BNDES shares collateral with banks to boost credit for infrastructure

The Brazilian Development Bank (BNDES) has reached an agreement with the leading banks in the country establishing new rules to share collateral in the financing of infrastructure projects. BNDES will start sharing collateral it gets from companies that get loans from the bank whenever partner lenders accept providing bank guarantees equivalent to at least 40% of the loan. The other 60% of guarantees, as receivables of the project, will be secured by BNDES itself. The rules are valid for the phase of construction, when the investments are still being made and the banks’ risk is higher.

The sharing of collaterals by BNDES will already be in effect for financing of the consortia that won the auctions of the Fortaleza, Salvador, Florianópolis and Porto Alegre airports in March, and also for the concessions of São Paulo state highways also auctioned in 2017. But other infrastructure projects may also benefit from the new rules. “It is an umbrella agreement and will mark our modus operandi with other banks moving forward,” says Claudio Coutinho, credit, financial and international director at BNDES.

Mr. Coutinho says that the discussion with banks, including Banco do Brasil, Caixa Econômica Federal, Itaú, Santander and Safra, was on conditions that permit these institutions better gauge the risks they are running. Greater clarity on the risks may lead to competition among banks to offer the guarantee to the project. As a result, the costs of the guarantee may fall, Mr. Coutinho says. A guarantee may cost between 1% and 2% of the project, according to estimates.

The negotiations defined the conditions that must be met for BNDES to declare the physical and financial conclusion of the projects that will have bank guarantee of the partner banks. The project will need to be ready and producing the expected cash flow. It will also have to ensure a minimum coverage ratio of the debt service of 1.3 times the cash generation of the last two years.

These are “objective” conditions that allow the partner banks understand what must occur for them to get out of the project risk when construction is concluded, says Luciene Machado, head of sanitation and transport at BNDES. She says that these conditions may be attested by financial statements or by companies that supervise the construction work.

In the market, companies complained that BNDES didn’t accept sharing its collateral, demanding from companies, in exchange of loans, very high corporate and financial guarantees, which often hindered the loans. Since last year, when it ceased to extend bridge loans, BNDES has been studying ways of bolstering the funding of projects.

Mr. Coutinho says the BNDES difficulty to share collaterals in the past was related to the fact that banks often only accepted participating in the first stage of the financing, of the bridge loan, with the offering of a low percentage of bank guarantee.

In general, these guarantees cover the first two years of a project, and the ideal is that they be expanded to periods of four to five years, when the projects tend to present operational viability.

“The sharing of collaterals will enable the better allocation of risks of the infrastructure projects, increasing the predictability to guarantors, potentially reducing costs,” Mr. Coutinho says.

BNDES is currently the largest lender to infrastructure projects in the country, having disbursed R$988 billion, in constant values, over the last ten years. The expectation is that, with the model of sharing collaterals, the projects may attract new investors, such as large foreign financial institutions, which could help finance the Brazilian infrastructure.

Source: Valor Econômico

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Brazilian companies resort once again to syndicated loans

After a weak start of the year, syndicated loans have once again become an option for well-rated Brazilian companies to raise funds abroad.

In the beginning of the year, with the bond market heated, companies preferred to issue securities, with which they could raise funds for a longer term. But as political uncertainty grew, with President Michel Temer being directly cited as involved in corruption in the testimonies of JBS executives, costs on the bond market rose a little and foreign bank loans have become attractive again.

Vale raised $2 billion in early June with a five-year credit facility. The mining company got it from a syndicate comprising 18 banks. In May, sugar and ethanol producer Biosev also rolled over a $318 million facility that was to expire in 2018 and extended it through 2020.

In the first quarter, syndicated loans to Brazilian companies amounted to $50 million, but with the new transactions the market expectation is to top the total of about $4 billion posted last year.

ING participated this year of the extension of a syndicated loan to Ascenty, an operator of data centers, in the first quarter. Last year, the company raised $155 million from a group of banks, and this year it managed to increase that facility to $190 million, maturing in five years, with two banks joining the loan. Proceeds will be raised for the construction of data centers in Brazil.

The bank also arranged in May the extension of a syndicated loan to another Brazilian company in the value of $200 million for three years. In general, terms of syndicated loans are shorter than those of bond issues and similar to those in Brazil. “The difference is that the banking market in Brazil is too concentrated. If the company needs to raise more than $1 billion, it may be cheaper to do the transaction abroad, where a higher number of banks can participate. But this access is restricted to a small universe of blue-chip companies,” says Ignacio Lorenzo, head of syndicated loans and financing for acquisitions at Santander Brasil.

When Brazil lost its investment-grade rating, traditional banks that used to participate in such type of loan reduced the credit limit to Brazil. In addition, the recession of the last two years reduced the need of Brazilian companies to raise new funds, and they are seeking only to roll over their existing debts. To have an idea of the drop in loans on this market, in 2015 syndicated loans to Brazilian companies reached $15 billion.

Mr. Canineu says banks have been seeking to reduce the so-called Brazil risk. The focus now has been on loans to subsidiaries of multinationals present in the country, Brazilian companies with operations abroad or exporters, or those in non-cyclical businesses, such as paper and pulp and food and beverages, which are less affected by the crisis.

Outside of these sectors, banks are more demanding regarding collateral. In the case of companies being investigated, but without operating problems, like meat processor JBS, banks have only been renewing the facilities and have included creditor-protection clauses that accelerate the debt, pegged to leniency agreements. “There are no new loans to these companies, at most the rollover of existing lines. But these transactions have been bilateral,” one executive says.

With high liquidity in the global financial market and interest rates that, despite rising, are still lower than in Brazil, fundraising abroad is still attractive for some Brazilian companies, even considering the cost of currency hedge.

In general, syndicated loans are contracts at a cost of Libor, the London interbank rate, which is below 2%, plus a spread, which depends on the country and company risk. “In general, if you do a three-year swap transaction of Libor to reais it still is cheaper than the [benchmark short-term rate] CDI,” says Mr. Canineu, with ING.

Source: Valor Econômico

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Brazilian companies still lack compliance departments

Amid the reform of the special listing segments of exchange operator B3, most companies on Novo Mercado still don’t have specific compliance departments, which are in general subordinated or connected to other activities within their administrative structure.

A survey identified that two-thirds of the listed companies on Novo Mercado, the strictest corporate-governance segment, still don’t have departments dedicated specifically to these functions, among which is the guarantee and verification of the compliance with legal and regulatory norms, in addition to the detection and combat of irregularities and violations of internal policies.

This doesn’t mean that the companies don’t have people taking care of these matters, but that, at least in the majority of cases, there isn’t a sector that is dedicated only to this – half of the companies, for example, have some type of program for risk management. The study considered as a specific department the one in which it was possible to identify some level of independence, without being connected or within other departments or committees with several responsibilities, like personnel management or legal counsel.

It was also examined, in April and May, the reference forms of the companies and sought to answer three questions to classify the specificity of the department: what are the main internal control practices, which organizational structures are involved, and whether there is a formalized policy of risk management and compliance.

It’s possible to show with the study that companies have formalized divisions of internal audit, which are often connected to compliance. However, differently from the auditing actions, which verify through sampling if the company is booking its numbers in accordance with the accounting standards, compliance is a deeper activity, aimed at the creation of a corporate culture in which all the employees are stimulated to combat irregularities.

In the Novo Mercado reform, B3 doesn’t impose requirements of a department exclusively for compliance. According to the exchange operator’s proposal, which is in the process of a vote, companies should implement this role, and also the attributions of internal audit, internal controls and risks.

Although it is seen as an important step in relation to the current regulation of the segment, which doesn’t establish these demands, a greater advance would be to treat compliance as a more independent function and, mainly, to act in the oversight of adherence to rules, considering that the involvement of large companies in corruption scandals has cast doubts on the capacity of Novo Mercado to act against irregularities.

Meat processor JBS, investigated by the Securities and Exchange Commission of Brazil (CVM) for transactions carried out in the financial market, already had, since November 2015, a policy of relations and management of risks with government entities and public agents. On May 26, one week after the outbreak of the scandal of bribery payments to politicians by its controlling shareholders, the company said that it had created a governance committee, responsible for implementing compliance practices. On June 14, in another move to try to reinforce the department, JBS announced the nomination of attorney Marcel Proença to the position of global director of compliance and the hiring of law firm White & Case to support the project.

To avoid the repeat of cases like this one, the responsibility for verification, is primarily up to regulatory agencies and to the companies’ board of directors and fiscal councils, but the B3 itself could periodically take on the responsibility of checking whether there is sufficient evidence that the committees and responsible departments are active, and not only that the company has a set of rules.

The Novo Mercado currently has 130 listed companies.

Source: Valor Econômico

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Vale shareholders prepare for decisive meeting

Vale and its investors are in a countdown to the shareholders’ special general meeting on the 27th, considered the most important since the mining company was privatized in 1997. The meeting is expected to have record attendance and there is optimism that it will be possible to get support from shareholders to approve the conversion of preferred into common shares, the change of the company’s bylaws and the merger of Valepar, holding company that controls the mining giant, into Vale.

The presence of investors in the SGM is expected to top historical marks, sources said. Credit Suisse recently released a report showing that the latest general shareholders’ meeting of Vale, in April, had attendance representing 71% of the equity, the highest of the last ten years. The SGM is expected to be as big or bigger.

Vale will need the support of 50% plus one vote of shareholders to approve the items on the agenda, which depend on each other. Valepar and BNDESPar, investment arm of the Brazilian Development Bank, will abstain from voting at the SGM, with exception of the item regarding amendment of bylaws. Altogether, Vale has 255,000 shareholders and a capital of 5.1 billion shares, excluding shares held in treasury.

If the majority is secured in the meeting, a second step of the operation will begin. There will be a 45-day period, until the week of August 11, for preferred shareholders to decide whether they swap their shares for common shares in the mining company. Valepar set a floor of 54.09% of participation of preferred shareholders. It means that if the participation is smaller, the operation will not go ahead. This percentage was defined considering math according to which the controlling shareholders, once the floor is reached, will hold less than 50% in the company.

If there is conversion of 100% of the preferred (PN) shares, the current controlling shareholders gathered at Valepar (Bradesco, BNDESPar, Mitsui and pension funds of state companies, led by Previ, in addition to Electron, an Opportunity fund) will hold 41% of Vale. They are also forced to maintain 20% of that for three years, being cleared after that period to sell everything. It is known that part of the controlling shareholders, especially the pension funds, wants to give liquidity to their shares in Vale.

In case of approval of the proposals and achievement of the minimum number of shares for conversion, the following step, still in August, is likely to be the merger of Valepar into Vale, for which the controlling shareholders will get a 10% premium, estimated by the market at about R$4.5 billion. To migrate to the Novo Mercado special listing segment of B3 (former BM&FBovespa), Vale needs to secure the participation of 100% of the preferred shareholders. But this is not likely to be obtained in the near term, and the company set a three-year period, until 2020, for a possible migration.

Despite the optimism, there are risks for the operation. One is what the participation of individual investors will be. Vale doesn’t inform how much of its equity is held by individual investors, but Credit Suisse estimated in its report that individuals in Brazil hold 15.91% of the preferred shares in the mining company. The so-called passive funds, managed by banks, will also have a relevant role in the operation. Vale will make an online institutional campaign to inform small investors of the operation’s advantage, from its viewpoint.

Another point of concern is the position that Capital Group, largest holder of preferred shares in Vale, with about 20% of those shares, will take. Since Vale announced the transaction, in February, Capital privately expressed concern about the conversion ratio of preferred and common shares, which includes a discount of about 6% to PN holders. Valor has learned that some Capital funds manifested they will vote against the first item of the agenda, the voluntary conversion of preferred shares into common ones at the ratio of 0.9342 PN to one ON. Capital participates in Vale through three big groups of funds: Capital Research, Capital International and Capital World. Capital didn’t respond to a Valor email requesting comment.

People familiar with the matter say Capital’s vote against the conversion would be to mark a position, because later, in the 45-day window that will be opened after the SGM for conversion of stock, the trend would be for these funds against the conversion ending up joining the operation because of the risk of being left holding a share with little liquidity. Even though the proposed discount in the swap of PN for ON is 6%, there are estimates that, once the conversion period ends, this difference may increase to 15% or 20%, given the little liquidity expected for preferred shares.

Source: Valor Econômico

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Senate setback for Brazil’s Temer rattles reform agenda

A Brazilian Senate committee on June 20 rejected President Michel Temer’s labor reform bill, in an unexpected blow to his administration that does not kill the pro-market proposal, but shows weakening support for his agenda.

Even after being rejected in the social affairs committee by 10 to 9 votes, the proposal moves to the constitutional and justice committee before its heads to the floor for a full vote, said Ricardo Ferraco, the senator drafting the bill. Ferraco said he expected the bill to be approved by late June.

The surprise setback shows corruption allegations against Temer have eroded congressional support to approve his austerity reforms which are considered key to pulling the economy out of its worst crisis in decades.

Brazilian assets tumbled after the reversal, revealing investors’ concerns with Temer’s capacity to plug a widening fiscal deficit that has cost Brazil its coveted investment-grade rating.

Temer, who took office last year after the impeachment of leftist Dilma Rousseff, is under investigation over allegations he took millions of dollars in bribes from the world’s largest meatpacking company, JBS SA. Temer has denied any wrongdoing.

His main ally in Congress, the Brazilian Social Democratic Party, has said they will break away from his coalition if Temer fails to approve the labor and pension reforms.

Speaking to reporters in Russia, Temer downplayed the setback, saying he is confident the Senate floor will approve the proposal in coming weeks.

For final approval, the labor reform just needs a simple majority on the Senate floor.

On the other hand, the controversial pension proposal, which sets a minimum age of retirement and cuts retirement benefits, needs three-fifths of the votes in both the senate and the lower house to be approved.

Source: Reuters Brazil

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Companies get court orders to extend payroll-tax cut

Taxpayers have been winning provisional court orders to maintain payroll-tax cuts until December 31 of 2017. The program to lower the payroll burden, created in 2011, allowed some sectors to pay between 1.5% and 4.5% on gross revenue — the Social Security Contribution on Gross Revenue (CPRB) — instead of 20% on payroll.

It was beneficial to most taxpayers. But provisional measure (MP) 774, of 2017, extinguished the regime from July with the justification that it didn’t contribute to economic growth.

There are already preliminary court orders at least in the Federal District and the states of São Paulo, Rio de Janeiro and Rio Grande do Sul, making companies that obtained the right to stay in the regime for at least six more months save millions of reais. The government can appeal of those decisions.

In Congress, several sectors have been putting pressure to avoid the suspension of the payroll-tax-cut regime. The sponsor of MP 774, Senator Airton Sandoval (Brazilian Democratic Movement Party, PMDB, of São Paulo), may read his report at the joint committee analyzing the matter on June 23.

The main argument of the lawsuits is that Law 12,546, which instituted the payroll-tax-cut regime, establishes that companies can’t back down from their option to paying taxes over payroll or over gross revenue, with the option valid for the entire calendar year. This way, they argue that the end of the regime in the middle of the year goes against the legal security and the good faith of taxpayers.

Recently, a large call-center company won a writ of mandamus from the 21st Federal Civil Court of São Paulo. For the judge, “the non-retractable nature created by the legislator himself must be respected by both parties, under penalty of the legal security be violated. Therefore, the same way that it is forbidden to the taxpayer to alter the taxation regime during a certain year, in accordance to its convenience, the tax authority can’t, for the same reason, promote such alteration in the same year.” The judge thus defined that the alteration promoted by the MP can only affect the taxpayer from January 2018.

Otherwise, if these decisions didn’t secure the taxpayers’ right, it could create room for discussing in court the change of option of taxation regime by real profit for taxation by presumed profit, or vice-versa, throughout the year, since it would be a similar discussion. “These orders guarantee the legal security, the predictability, since companies made the option based on their annual planning. You can’t change the rule of the game in the middle of the year,” he says.

An agricultural cooperative also won an order from the 1st Court of Santa Cruz do Sul, Rio Grande do Sul. Judge Dienyffer Brum de Moraes stated that it is “unassailable the commitment to respecting the option made by the taxpayer until the end of the fiscal year, being inadmissible that the public power itself comes to violate it or modify it in the meantime, in respect to the good faith while specific projection of legal security value, essential to a state that aims to be the rule of law.”

Judge Charles Renand Frazão de Moraes, of the 2nd Federal Court of Brasília, also granted order to a manufacturer of aircraft. For him, “since article 9 of Law no. 13,161/2015 instituted that the option made by the taxpayer would be valid, in a non-retractable way, throughout the entire year 2017, the state couldn’t modify or revoke the period of enforcement for the taxpayer’s option, and consequently apply a new legal tax regime as it so wishes, exactly as it happens in the present case.”

Source: Valor Econômico

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Government wants to give power to BC to participate in leniency deals

The leniency agreement stipulated in Provisional Measure (MP) 784, which increased the punitive powers of the Central Bank (BC) and of the Securities and Exchange Commission of Brazil (CVM), exclusively reaches administrative infractions committed by agents of the financial system and of the capital markets. To encompass criminal conducts, such as money laundering and corruption, the government may submit a bill or an amendment to the provisional measure already being considered in Congress stipulating the joint action of the Federal Public Ministry (MPF, the public prosecutors’ office), the BC and the CVM. Only the MPF has the prerogative of criminal prosecution.

The prosecutor general of the Central Bank, Cristiano Cozer, explained: “The leniency agreement with the BC only covers administrative infractions, not crimes. It wouldn’t make sense an offender to sign agreement only with the BC, because it would need to confess and run the risk of responding to criminal charge filed by the Public Ministry. Much less in cases of facts prior to the issuance of MP 784, when the fine was [and continues being] of at most R$250,000.”

Issued last week, the measure has been object of criticism by the MPF and of mistaken interpretations either in relation to its content or to the timing of its publication.

The BC attributes this noise to the climate of “animosity” now sweeping the country. This would be the reason to identify the publication of MP 784 with the expected plea bargain of ex-Finance Minister Antonio Palocci, involving players of the financial system, and with the investigations of insider trading that would have produced gains for JBS on the forex and interest markets.

Yet the measure has no guarantee of retroactive effect. In reality, there are two hypotheses. In the punitive law, new rules retroact only in benefit of the defendant. In the procedural law, the new legislation will be retroactive depending on the state in which the proceeding is. In that context, there will be a discretionary analysis of each case presented to the BC.

The provisional measure innovates by typifying the administrative infractions until then addressed only by resolutions of the National Monetary Council (CMN). For not being described in law, the Superior Court of Justice (STJ) was overturning administrative penalties imposed by the BC on the financial system. The MP describes 17 illegal actions that go from posing constraints to the BC supervision to providing incorrect information and data, acting as administrator of financial institution without prior BC approval, structuring transactions without economic grounds or misappropriating funds of third parties.

This description will not solve the stock of financial-system cases that is in the judiciary, but with it the STJ may consolidate a jurisprudence, public-sector lawyers reckon.

The provisional measure, in this sense, is structural. And the introduction of the leniency agreement is, in the view of the monetary authority, only an “appendix” to the new legislation.

The discussion on the terms of MP 784, which also updates the values of fines imposed on the financial system in case of infraction, is a recommendation of the G-20 and had beginning at the Central Bank in 2010, in the preparatory evaluation of the Financial Sector Assessment Program (FSAP) of the Basel Accord. The bill was sent to the Office of the Chief of Staff in the second term of Dilma Rousseff (Workers’ Party, PT). With the change of government, it returned to the BC and was taken as part of the “BC Plus” agenda at the end of 2016 by its president, Ilan Goldfajn.

In July there will be new FSAP evaluation, made by the IMF and World Bank, with impacts on the country’s rating and risk premium. Because of that, the BC opted for issuing a provisional measure, a faster initiative, abandoning the original idea of a bill.

The country was not appearing well on the picture of the international organisms, one government official says, for having a legislation of administrative proceedings dated of 1964, when law 4,595, which created the Central Bank, was enacted. The values of the fines imposed on the financial system were frozen since the 1990s at a maximum of R$250,000, value that MP 784 raised to as much as R$2 billion.

The terms of the provisional measure were inspired in the legislation of the Administrative Council of Economic Defense (Cade), even making use of its instruments, such as the leniency agreement, the terms of commitment and the cautionary measures. BC and CVM thus start to invest more in the intelligence activity, with more investigative capacity.

Administrative wrongdoing committed before the publication of MP 784 are likely to be punished with the fines existing until then, of R$250,000, charged by the BC, and of up to R$500,000, imposed by the CVM. Because of these small sums, there is no expectation that individuals or financial institutions will approach the BC and the CVM to make leniency agreements without crime. The most probable is that whoever committed crime will directly seek an agreement with the Public Ministry and, with that done, will go to the BC or the CVM to settle the accounts of potential administrative infractions committed.

On June 12, the BC released an official note in which rebuts sharp criticism made by prosecutors in stories and articles published in the press during the weekend. The note attests that the measure “in nothing alters or interferes in the capacity of investigation and substantiation of criminal wrongdoing of the Public Ministry. Nor does it alter the legal duty of the BC and of the CVM of communicating indications of crime to the MPF.” It is common for the Central Bank to act as an assistant of the accusation in proceedings it sends to MPF investigation and to lend analysts to help clarify the nature of infractions committed. It also says that the urgency of the provisional measure comes from the evaluation of Brazil in the FSAP, which begins next month.

The proposal of updating the legislation was widely announced and released in Agenda BC+ and, therefore, “the MP has no relation with rumors of plea deals that emerged later and whose content is unknown.”

Source: Valor Econômico

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Retailers try to delay new rules for online marketplaces

Large operators of online marketplaces are trying to delay the implementation of a new Central Bank rule for payment settlements that will directly affect their business.

The Central Bank (BC) decided that from September 4th on, these companies’ entire flow of payments must be settled at the Interbank Payments Chamber (CIP), which is already responsible for most of the banking transactions in Brazil. Marketplace operators claim this may cut into their margins by reducing financial revenues and adding operating costs.

By the rules defined, all companies that operate in the online marketplace chain must be registered and certified at the CIP. And they will be required to settle their transactions within the chamber’s system. It has been said that because the Central Bank is concerned about the systemic risk that such marketplaces may pose to the market for the growing volume of transactions. Retailers that operate these marketplaces are the ones that transfer to the merchants, marketplace customers, the amount of the purchase made by the consumers.

Online marketplaces operate like virtual malls, with merchants having their operations hosted by the websites of chains such as Casas Bahia and Americanas.com, which charge a fee for that. At every sale, the big chains get the amount and split the values. Part goes to the merchant who sold the good and part is kept by the marketplace operator — as much as 15%. Today, 25% of e-commerce sales in Brazil are sold by marketplace vendors, according to the Brazilian Association of Electronic Commerce (Abcomm) — that is likely to amount to about R$10 billion in 2017.

There is a series of impacts with the change that vary according to the type of deal. BC has requested companies last week to define these effects in a report and to hand it this week. One of the key issues — in addition to the need of discussing how to adapt to the requirement of settlement at the CIP — is in the financial effect of the measure. That is because the rule affects one of the online marketplace’s tripod.

It is the condition under which the retail chains that operate the online marketplaces make payment advances to the merchants. Currently, groups such as Via Varejo (which owns Ponto Frio and Casas Bahia) and B2W (Submarino, Americanas.com) offer this financial service, considering that they, as intermediaries, have access to the sales’ funds. This provides them with an additional income.

But merchants may also get advances from banks, and since the marketplace data are not visible to the market, it is not possible to know the real amount advanced to merchants. If this occurs, limits of advances through the marketplace may fall.Industry companies understand that the financial service is likely to be hindered by this.

Another expected effect has to do with the credit portfolios of collective-buying marketplaces. Since clients paid for services but don’t redeem them immediately, this credit was profit for the companies, as site Brazil Journal reported in an article last week on the new rule. With the centralized settlement, this ceases to exist.

There is a fear of imbalances in this new structure set up around online marketplaces. Since retail chains started to operate within the payment chain, if the chains (especially medium-sized ones) cease to pay merchants they host in their websites, or differ the payments, there is the risk of putting small merchants in a difficult situation.

At this moment, marketplace operators are evaluating how to adapt to the requirement. There are two possible alternatives: hiring a merchant acquirer or payment facilitator to handle these activities in their place (which have systems interacting with the CIP) or doing themselves the adjustment of the systems to settlement at the chamber. In this case, they will also need to use an intermediary certified to communicate with the CIP network — which could be a specialized company, such as RTM, or a bank.

The main issue is cost: spending on internal development or paying a third party? “The small will not manage [to develop]. It will have to use a third party. For a big one, looking into the medium run, depending on the volume, this becomes expensive [and it is better to develop],” says Maurício Salvador, with Abcomm.

In this format, marketplace operators initially hire merchant acquires such as Cielo, Rede and Stone or other payment processors such as MoIP and Aceita Fácil, which are certified to settle transactions at the CIP. At the same time, they will develop their own systems. Some have already started this work and are thinking of going beyond the connection to the chamber.

Mr. Salvador, with Abcomm, says the investment in such a system will depend on how the retailer’s technology environment is structured, whether it is compatible or not with the CIP requirements, and may reach some millions of reais.

The new rule for online marketplaces is a development of the regulatory framework for electronic payments of 2013. It was published in September 2015 and the deadline of September 4th for adaptation to the system was established in an order of December 2016. Discussions on how to adapt to it, however, only began about two months ago.

The Central Bank announced that the provision of payment services is an activity of public interest and therefore demands minimum conduct rules. “The BC also understands that the standardization brought by the implementation of centralized settlement will facilitate the exchange of basic information of payment transactions, information that all companies that participate in the flow of payment must hold.”

The BC also pointed out that the regulation for centralized settlement was made public in 2015 and that since December 2016 the deadline of September 4th was established. Also in the note, the BC said that the new rules aim to ensure gains of efficiency to the market and seek to end inefficiencies brought by the existence of multiple providers of settlement service. The BC also said it has been working to clarify the market agents and to evaluate if new measures will be necessary.

Source: Valor Econômico

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