BRAZILIAN SECURITIES AND EXCHANGE COMMISSION (COMISSÃO DE VALORES MOBILIÁRIOS “CVM”) DISCLOSES CIRCULAR LETTER ON LIQUIDITY RISK MANAGEMENT TOOLS IN FUNDS

On September 17th, 2018, the Superintendence of Institutional Investor Relations (Superintendência de Relações com Investidores Institucionais  -“SIN”) of the Brazilian Securities and Exchange Commission (“CVM”) issued Circular Letter 10/2018 / CVM / SIN (“Circular Letter”) addressed to the Officers Responsible for Administration and Management of Funds of Investment. 

The purpose of the Circular Letter is to provide guidance on procedures related to the provisions of art. 91 of “CVM” Instruction 555/2014 (“ICVM No. 555/14”) and on the study of regulatory alternatives for the incorporation of new liquidity management tools in the fund industry. 

For this purpose, the Circular Letter is responsible for detailing the duty of the administrator and the investment fund manager to jointly adopt policies, procedures and internal controls necessary to make the liquidity of the fund compatible with the terms established in its regulation for redemption requests, in addition to fulfilling the fund’s obligations. 

Such internal policies, procedures and controls shall take into account: (i) the liquidity of the assets; (ii) the obligations, including expected margin deposits and other known guarantee s and unavailability; (iii) the expected redemption values under ordinary conditions, calculated with consistent and verifiable statistical criteria; and (iv) the degree of dispersion of quota ownership. 

In view of this scenario, “SIN” considered it opportune and necessary to clarify its interpretation on certain provisions of “ICVM No. 555/14”, mainly in relation to the liquidity management measures allowed in the interpretation of said technical area. 

In this sense, we highlight “SIN’s” understanding that the use of the swing pricing tool is not allowed and would not be desirable given the challenges associated with (i) transparency in the allocation of costs to the investor in these circumstances,(ii) complexity of understanding by the average investor in relation to the application of the mechanism, and (iii) the fact that, for the purposes of systemic protection, the already admitted exit rates would offer similar mitigation, with more transparency and simplicity than swing pricing.

Detailed information, as well as the full text of the Circular Letter can be found on the CVM website: www.cvm.gov.br.