## cr18358-brazilfsap ## Source details **Canonical URL:** [cr18358-brazilfsap](https://www.imf.org/-/media/files/publications/cr/2018/cr18358-brazilfsap.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18358-brazilfsap.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18358-brazilfsap.pdf.json) --- ### EXECUTIVE SUMMARY — Overview and sector size - Total investment fund assets under management (AUM) by Brazilian fund management companies reached R$3.57 trillion by the end of December 2016, representing roughly 55 percent of Brazil’s GDP. - Brazil’s fund management sector is the seventh largest globally. - 555 funds are predominant, representing approximately 90 percent of AUM. - Asset mix of 555 funds: fixed income funds approximately 65 percent of AUM; multi-market funds 20 percent of AUM. - Total AUM growth: from R$ 1,954,780 million in 2011 to R$ 3,573,335 million in 2016. - Interest rates: recent peak of 14.25 percent; declining rates have spurred investor interest in products other than fixed income. - Market concentration: the top 5 full administrators account for approximately 66 percent of the total AUM of 555 funds. ### EXECUTIVE SUMMARY — Institutional framework and SRO role - Regulatory authority: Comissão de Valores Mobiliários (CVM) is the competent regulator for investment funds. - ANBIMA acts as a voluntary self-regulatory organization (SRO) and as the industry representative/advocacy body. - ANBIMA membership: 275 members; around 400 asset managers apply ANBIMA codes voluntarily. - ANBIMA Supervisory Department staffing: 45 staff. - Certification pass rate for ANBIMA exam: roughly one-third of entrants. - Sanctions available to ANBIMA include public admonition, a fine (capped at 100x the monthly membership fees of entities), removal of the ANBIMA “seal”, or expulsion. - Current issue: ANBIMA lacks a statutory basis for its SRO role, is not overseen by CVM, and CVM is not represented in ANBIMA decision-making bodies. - Resulting issues: duplication of supervisory effort; limited CVM oversight/input into ANBIMA’s risk-based methodology and supervisory priorities. ### EXECUTIVE SUMMARY — Regulatory framework and supervision - Legal framework components: - Federal Law No. 6,385/76 (established CVM). - CVM Rule 438/06 (accounting rules for retail investment funds). - CVM Rule 539/14 (suitability rules; definitions of qualified and professional investors). - CVM Rule 555/14 (formation, registration and operation of mutual funds). - CMN Resolution No. 3,334/05 (rules for financial institutions acting as fund managers). - CMN Resolution No. 3,568/08 (foreign exchange controls for funds investing abroad). - Supervision observations: - CVM receives extensive data, with the most detailed, machine-friendly data covering 555 funds (about 90 percent of AUM). - Data gaps exist for non-555 funds; these funds (notably private equity and asset-backed securities funds) are typically closed-ended, less liquid, and subject to less detailed reporting. ### RISKS, LEVERAGE, AND LIQUIDITY MANAGEMENT — Key findings and recommendations - Leverage - Finding: There is no regulatory definition of leverage, impeding measurement and comparison across funds. - Finding: Absence of a regulatory cap on leverage may increase vulnerability in specific funds or groups of funds. - Recommendation and timeline: CVM should prioritize establishing a definition of leverage by the end of 2019, in coordination with IOSCO, and subsequently set a cap on leverage for individual funds and/or groups of funds managed by the same asset manager. - Liquidity management - Framework is “strong and balanced” to prevent build-up of liquidity problems. - Current limitation: fiduciary administrators lack tools to deal with crystallized illiquidity and must move immediately to suspension of subscriptions and redemptions. - Recommendation: broaden the set of liquidity management tools available to fiduciary administrators to allow more flexible management of illiquidity situations. - CVM should monitor carefully the impact of the waterfall approach on second-round redemption effects where funds face unexpected redemption requests. ### DATA, VALUATION, AND FUND TERMINATION - Data - CVM should initiate discussions with market participants and stakeholders to bring data on non-555 funds to the same detailed and structured level as 555 funds. - CVM should cooperate with BCB, ANBIMA and B3 to encourage market participants to use SELIC instead of CDI as a benchmark. - Valuation and termination - CVM’s rules on termination of investment funds are high-level and leave significant discretion to fiduciary administrators. - Recommendation: CVM should issue more detailed guidance on termination, taking into account the IOSCO Report on Good Practices for the Termination of Investment Funds. - CVM should be given a statutory basis to allow it to participate in the termination process. ### RESOURCE ADEQUACY AND SUPERVISORY CAPACITY - Staffing and resources — findings - The last open competition to recruit new CVM staff was held in 2010; CVM resources do not reflect sector size, growth, or importance of investment funds. - Consequence: limited staff means certain issues are not addressed as CVM would consider appropriate. - Recommendation - Increase CVM resources as a matter of priority and give CVM more freedom to hire appropriate staff to reinforce independence. ### Key recommendations (priorities and addressees) - High priority: - A more extensive and formal set of cooperation arrangements between CVM and ANBIMA regarding investment fund supervision. — Addressees: CVM and ANBIMA. - Increase the resources of the CVM. — Addressee: Ministry of Finance. - CVM should prioritize ongoing work to establish a definition of leverage by the end of 2019, in coordination with IOSCO, then set a cap on leverage for a particular fund and/or for groups of funds managed by the same asset manager. — Addressee: CVM. - Medium priority: - Fiduciary administrators should have access to a broader range of liquidity management tools that can be put in place without requiring prior approval of unitholders. — Addressee: CVM. - CVM should monitor carefully the impact of the waterfall approach on second-round redemption effects in cases of unexpected redemption requests. — Addressee: CVM. - CVM should initiate discussions with market participants on how to gather more detailed and structured data on non-555 investment funds. — Addressee: CVM. - CVM should cooperate with the BCB, ANBIMA and B3 to encourage market participants to use SELIC instead of CDI as a benchmark. — Addressee: CVM. - CVM should issue more detailed guidance on the termination of investment funds and be given a statutory basis to participate in the termination process. — Addressee: CVM. --- ### 11. ANBIMA’s role, both on rulemaking and supervisory activity, has expanded in recent — CVM and ANBIMA roles, staffing, and resources - Finding: ANBIMA’s role on rulemaking and supervisory activity has expanded in recent years, explained in part by ANBIMA’s relative freedom in setting its budget. - Finding: The number of staff in the CVM’s Office of Institutional Investors Supervision has not increased in line with the growth of the investment funds sector. - Finding: CVM staff are recruited through open competitions but the CVM does not control the timing; the last competition took place in 2010, preventing timely replacement of staff and resulting in significant staff vacancies. - Finding: Despite a risk-based supervisory approach, lack of resources means certain issues are not addressed as CVM would consider appropriate. - CVM total staff by category and year: - Analysts: 2013: 225, 2014: 249, 2015: 245, 2016: 235, 2017: 228 - Inspectors: 2013: 112, 2014: 119, 2015: 113, 2016: 108, 2017: 104 - Executive Agents: 2013: 129, 2014: 125, 2015: 121, 2016: 114, 2017: 110 - Total: 2013: 466, 2014: 493, 2015: 479, 2016: 457, 2017: 442 - Office of Institutional Investor Supervision staff by category and year: - Analysts: 2013: 35, 2014: 37, 2015: 36, 2016: 34, 2017: 29 - Inspectors: 2013: 1, 2014: 2, 2015: 2, 2016: 3, 2017: 4 - Executive Agents: 2013: 8, 2014: 7, 2015: 7, 2016: 6, 2017: 6 - Total: 2013: 44, 2014: 46, 2015: 45, 2016: 43, 2017: 39 - Recommendation: - The resources of CVM should be increased to reflect the significant number of entities under its supervision, the growth of the investment funds sector, and the sector’s role in Brazilian financial markets. - To reinforce CVM’s independence, the authority should be given more freedom to hire appropriate staff. ### 11. ANBIMA’s role — Structure of Brazilian investment funds and main service providers - Finding: Brazilian investment funds are required to be structured as a condominium (a pool of assets); unitholders hold fractions and each unit confers one vote in the general assembly of unitholders. - Finding: Fiduciary administrators, asset managers, custodians, auditors, and other service providers are subject to decisions of the general assembly. - Fiduciary administrator (regulated by CVM Instruction 558/15): - Duties include preparation and disclosure of constitutive documents and periodic information; hiring and supervising all service providers; supervising compliance by the asset manager with regulatory framework, investment strategy limits and liquidity management policies; controlling subscriptions and redemptions by investors. - Asset managers: - Hired by fiduciary administrator; responsible for making and implementing investment decisions in accordance with the fund’s founding documents, CVM Instruction 558, and the instruction governing the specific fund type. - Custodians: - Responsible for safekeeping investment fund assets; covered by CVM Instruction 542. ### 11. ANBIMA’s role — Investor categorization and distribution of AUM - Investor categories and criteria: - Professional investors: - Financial Institutions - Insurance companies - Pension funds - Individuals with more than R$10 million in financial assets - Investment funds, clubs (if managed by an asset manager authorized by CVM) and authorized market participants: registered representatives, asset managers (individual), analysts and advisors - Foreign investors - Qualified investors: - Professional investors - Individuals with more than R$1 million in financial assets - Individuals approved in exams or holders of certificates accepted by CVM for registration as registered representatives, asset managers (individual), analysts and advisors - Retail investors: all investors who are neither professional nor qualified - Finding: The categorization affects which types of funds can be marketed to each group. - AUM distribution figures: - Distribution of AUM by Investor Segment (In percent): Institutional 39%, Corporate 15%, Private 15%, Retail 16%, Government 8%, Foreign/Others 7% - Distribution of AUM by Institutional Investors (In percent): Public Pension Funds 15%, Private Pension Funds 22%, Insurance 6%, Open Pension Funds 45%, Capitalization 1%, Investment Funds 11% ### 11. ANBIMA’s role — Types of funds and investor access (Group: 555) - Equity: Retail ✓, Qualified ✓, Professional ✓ - Fixed Income: Retail ✓, Qualified ✓, Professional ✓ - Foreign Exchange: Retail ✓, Qualified ✓, Professional ✓ - Multimarket: Retail ✓, Qualified ✓, Professional ✓ - Structured Private Equity: Retail ×, Qualified ✓, Professional ✓ - Structured Asset-Backed Securities: Retail ×, Qualified ✓, Professional ✓ - Structured Real Estate: Retail ✓, Qualified ✓, Professional ✓ - Structured National Film Industry Funding: Retail ✓, Qualified ✓, Professional ✓ ### 11. ANBIMA’s role — Diversification and concentration limits - Finding: CVM specific instructions lay down portfolio concentration limits by issuer and asset type for 555 funds; limits must be applied jointly. - Example: - A fund may invest up to 100 percent of its NAV in securities issued by financial institutions authorized by BCB (per Table 5) but only up to 20 percent of its NAV in securities of a given financial institution (per Table 4), implying diversification across at least five different such institutions if investing fully in that class. - Table 4: Portfolio Concentration Limits by Type of Issuer (Instruction 555/14, Article 102 item) - I Financial Institution authorized by BCB: 20 (Percentage of Investment Fund NAV in a Single Issuer) - II Publicly listed company: 10 - III Investment Fund: 10 - IV Person fund or company not listed in the above items: 5 - V Federal Government: unlimited - Table 5: Portfolio Concentration Limits by Financial Asset Type (Maximum NAV (percent)) - 20 percent category: - Investment funds unit - Fund of funds unit - Units of investment funds exclusively targeted at qualified Investors - Units of funds of funds exclusively targeted at qualified investors - Real estate funds units - Asset-backed investment funds units - Asset-backed funds of funds units - ETFs units - Real Estate Receivables certificates - 5 percent category: - Units of investment funds investing in non-standardized credit receivables - Units of investment funds investing in other investment funds that invest in non-standardized credit receivables - Units of investment funds targeted exclusively at professional investors - Units of funds of funds targeted exclusively at professional investors - Unlimited category: - Federal Government Bonds - Gold (if negotiated at exchanges or other organized markets) - Financial Institutions Bonds - Securities other than those already listed in this table, provided they were publicly offered and in compliance with CVM rules - Publicly listed companies’ promissory notes, bonds and shares, if they were publicly offered in compliance with CVM rules - Derivatives ### 11. ANBIMA’s role — Asset composition and valuation practices - Finding: Government securities are the predominant asset class for Brazilian investment funds; this concentration is a potential area of concern given Brazil’s government securities credit rating is below investment grade. - Aggregate asset compositions and total net assets (Data as of September 2017, Source: BCB): - Fixed-Income Funds: Total Net Assets (TNA): R$2.3 trillion - Multi-Market Funds: Total TNA: R$0.5 trillion - Equity Funds: Total TNA: R$0.1 trillion - Valuation practices: - Each fiduciary administrator must have a manual, published on its website, setting out valuation practices for liquid and illiquid assets; CVM verifies appropriateness as part of its risk-based supervision plan. - Funds must follow national accounting standards adherent to IFRS, aligning the Brazilian framework with IOSCO Principle 27. - Most funds calculate NAV and unit prices daily; fiduciary administrator is responsible. Less frequent calculation allowed only if consistent with dealing frequency and provided for in by-laws. - Pricing errors are treated by CVM as operational errors; any investor losses must be refunded by the fiduciary administrator. - CVM supervisory focus on valuation (2017–18 Supervision Plan): - Systematic analysis of auditors’ comments on funds’ financial statements, with follow-up requests for clarification. - Assessment of mark-to-market valuation methodologies published by fiduciary administrators. - Sample checks of valuations performed on assets of particular funds, selected based on risk parameters such as liquidity, use of models, and likelihood of conflicts of interest. ### Managing liquidity risk and large redemptions - Framework safeguards for 555 funds include: - Transparency: investor disclosure and specific regulatory reporting on liquidity. - Portfolio limits: diversification limits by asset type and issuer. - Policies and procedures: liquidity risk management and stress testing; redemption frequency must be consistent with investment strategy. - Fiduciary administrators are required to carry out stress tests that at least take into account: - Redemption pressures - Liquidity of the assets - Liabilities and conversion periods - Frequency appropriate to the fund’s characteristics, historical scenario variations, and current market conditions - Finding: CVM can request stress test results but does not carry out its own stress tests. - Suspension and EGM rules: - If material liquidity issue arises, fiduciary administrator may suspend subscriptions and redemptions. - If suspension lasts more than five days, an extraordinary general meeting (EGM) of unitholders must be called and held within 15 days. - EGM options include replacement of fiduciary administrator and/or asset manager; redemption in kind; lifting the suspension; creation of a side pocket; liquidation of the fund. - Recommendation: - It would be beneficial for fiduciary administrators to have access to a broader range of liquidity management tools, such as deferred redemptions, gates or side pockets, that could be put in place where appropriate in the best interests of unitholders, but without requiring unitholder approval at an EGM. - Waterfall vs pro rata in asset sales under unexpected material redemptions: - Waterfall: liquidate most liquid securities first, then use cash to cover residual redemptions; can lead to regulatory passive breaches of portfolio concentration limits. - Pro rata: use cash and liquidate securities proportionally to their share in liquidity buffers. - Finding: CVM’s policy is not to apply penalties or sanctions for “passive breaches”; this may unintentionally encourage more redemptions if unitholders see the fund becoming less liquid. - Recommendation: If a fund experiences a serious liquidity shortage, CVM should carefully monitor the impact of the waterfall approach on second-round redemption effects and, if appropriate, reconsider its policy of not taking enforcement action against passive breaches of portfolio concentration limits. ### LEVERAGE — metrics, findings, and recommendations - Finding: Funds cannot borrow directly but can generate leverage via derivatives, repurchase, and securities lending activities. - CVM supervision: 2017–18 Supervision Plan includes leverage as a specific risk event; CVM monitors margin requirements imposed by B3 on exchange-traded derivatives and cross-checks against liquidity and redemption data provided by fiduciary administrators. - Leverage metrics and observations (no single regulatory definition of leverage): - The accounting ratio of assets to net capital for investment funds is around 103 percent. - Exposure to securities lending represents 0.5 percent of industry NAV. - Exposure to reverse repos represents 1.18 percent of industry NAV. - Required margin for derivative contracts represents 1.8 percent of industry NAV. 50 percent of the notional value of all derivatives is subject to margin deposits (exchange-traded derivatives). - The Gross Notional Exposure of all derivative contracts is equivalent to 71 percent of industry NAV (this does not take into account netting or hedging arrangements). - Finding: Leverage is low on average although pockets of higher leverage exist, primarily in exclusive-investor funds held by banks. Margin requirements set by B3 act as a brake. - Finding: There is no regulatory definition of leverage nor a cap on leverage for individual funds or groups of funds managed by the same asset manager. CVM has started work to develop a definition and hoped to reach a conclusion by the end of 2019. - Recommendation: - CVM should give due priority to its ongoing work to establish a definition of leverage by the end of 2018 and should coordinate with IOSCO. - As a second step, CVM should set limits on leverage that can be generated by a particular fund and/or by a group of funds managed by the same asset manager. ### Termination of investment funds - Finding: The decision to wind up a fund can only be taken by the general assembly of unitholders, which decides how the fund will be liquidated, timing, and whether in-kind redemptions will be used. - Finding: The auditor must give an opinion about the fairness of the winding-up process. CVM’s role is limited to receiving information on the outcome from the fiduciary administrator. - Recommendation: - CVM’s rules on termination are rather high-level and leave significant discretion to fiduciary administrators. CVM should issue more guidance to market participants on the termination process, taking into account the IOSCO Report on Good Practices for the Termination of Investment Funds. - CVM should be given a statutory basis to allow it to participate in the termination process. ### Authorization of firms - Finding: CVM is responsible for authorizing firms (principally fiduciary administrators and asset managers) to conduct fund management activities. - Finding: Specific criteria in CVM Instruction 558/15 include having fit and proper senior managers, establishing appropriate policies and structures for risk management, and submitting information on oversight of compliance and delegated activities. - Finding: Applications for authorization are handled by the Office of Institutional Investors Supervision at the CVM. - Finding: It is possible for the same legal entity to be authorized by CVM both as a fiduciary administrator and an asset manager (full administrators); the top 5 full administrators account for approximately 66 percent of the total AUM of 555 funds. - With the exception of ETFs, CVM does not assess eligibility criteria for investment funds before authorization; authorization is granted automatically when the fiduciary administrator files necessary documents. --- ### 38. CVM relies mainly on off-site research for assessment — Authorization and supervisory approach - CVM relies mainly on off-site research to assess entities against relevant eligibility criteria, using sources such as the database of the Brazilian Department of Federal Revenue and CVM’s internal registers. - Information submitted by applicants is kept on file and verified during on-site inspections as part of ongoing supervision. - Discussions are under way between CVM and ANBIMA for ANBIMA to have an enhanced role in the authorization process for asset managers; ANBIMA would carry out initial due diligence before submitting the file to CVM. - Potential outcome: CVM may put in place a fast-track procedure for authorization of applicants screened by ANBIMA. - Benchmarks and recommendation: - The overnight unsecured CDI benchmark is still widely used despite being very lightly traded and not generally perceived to be representative of the true cost of funding for large banks relative to the much more active SELIC repo market. - Recommendation: CVM should cooperate with the BCB and other relevant authorities to encourage market participants to use SELIC instead of CDI as a benchmark. ### Delegation, custodians, and foreign funds - Delegated management: - Fiduciary administrator is responsible for selection of any third-party service providers and is jointly liable with third-party service providers for investor losses due to operational failings, rule breaches, or enforcement action by CVM. - Custodians: - Only financial institutions regulated by the BCB may act as custodians; separate authorization from CVM is required. - CVM Instruction 542 requirements include appropriate operational and technological capabilities and, for physically held assets, maintenance of physical structures with restricted access and safety mechanisms. - All financial assets of a fund must be registered in a system registry, subject to custody or safekeeping by the central securities depository and held in specific accounts opened in the name of the fund. - Foreign funds and investment limits: - Distribution/marketing of funds in Brazil is regulated and restricted to entities domiciled in Brazil. - Common practice: establish a domestic fund that invests in the foreign fund. - Instruction 555 thresholds: - Funds open to professional investors can invest up to 100 percent in non-Brazilian assets. - Threshold drops to 40 percent for funds open to qualified investors. - Threshold is 20 percent for retail funds. - The average amount of total NAV currently invested in foreign assets is low (approximately 2.5 percent). ### CVM’s supervisory approach, reporting, enforcement, and systemic monitoring - CVM applies a risk-based supervision approach using a matrix ranking “risk events” by probability and impact; outcome feeds into the two-year Supervision Plan. - Thematic supervision plans include verification of compliance by securitization vehicles; anti-money laundering policies; interconnectedness with other financial sectors. - Inspections data: - Fiduciary Administrators / Asset managers: 2015 = 44; 2016 = 50; 2017 = 51. - Investment Funds: 2015 = 39; 2016 = 34; 2017 = 37. - Use of regulatory reporting and liquidity monitoring: - Fiduciary administrators of 555 funds must provide extensive information to CVM. - Daily data: price of units, number of unitholders, NAV, AUM, subscription and redemption requests. - Monthly data: portfolio composition, a trial balance, value-at-risk, profile of unitholders (absolute numbers and percentage distribution of the fund’s net assets). - All data must be provided in a structured format using CVM’s electronic filing system. - Detailed portfolio holdings of all investment funds are made public on a monthly basis; derogations only allowed in specific cases and disclosure can be delayed for three months at most. - Reporting obligations for non-555 funds also apply but not necessarily in the same structured format. - CVM monitors liquidity of 555 funds daily using: - Liquid Assets (LA): total value of assets transformable into cash in current market conditions within the fund’s redemption period. - Predicted Cash Outflow (PCO): total value of cash outflow predicted within the redemption period. - When PCO > LA, CVM asks the fiduciary administrator for an explanation and may use supervisory powers to ensure appropriate action. - Recommendation: CVM should initiate discussions with market participants and other stakeholders to bring data on non-555 funds to the same level as 555 funds. - Enforcement: - Less material breaches: CVM issues a warning letter demanding an action plan and timeline. - More intrusive formal enforcement action can result in a warning, a fine, or removal of authorization. - Table 7 inspections: - Routine: 2015 = 70; 2016 = 86; 2017 = 75. - On-Demand: 2015 = 38; 2016 = 10; 2017 = 38. - CVM carried out 19 enforcement actions that led to judicial proceedings over 2014–2016 for irregularities including unauthorized investment activity, churning of fund portfolios, and insufficient due diligence. - ANBIMA imposed 269 fines on entities within the investment funds sector in 2017. - Systemic risk monitoring and shadow banking assessment: - CVM cooperates with the BCB to monitor systemic risk from the investment funds sector. - BCB monitors investment funds’ claims on banks using a “connections matrix” and register data shared by CVM. - Recommendation: BCB and CVM should work together to assess the liquidity of the government bond market, paying particular attention to a possible spike in yields due to liquidity shocks to investment funds and investor protection concerns arising from concentration in these securities. - BCB analysis of shadow banking: CVM-developed methodology excluded several fund categories; resulting exercise identified funds representing R$256.9 billion (i.e. about 10.9 percent of the total Brazilian investment funds industry) as potentially posing typical shadow banking risk. ### BCB/CVM work on “step-in” risk (Box 2) - “Step-in” risk: illiquidity of investment funds within financial conglomerates can create reputational pressure for banks to provide liquidity to related investment funds despite no statutory or contractual obligation. - BCB monitors bank-specific liquidity indicators that take step-in risk into account and aggregate liquidity indicators of the investment fund industry. - Bank-specific liquidity indicator: Liquidity Coverage Ratio (LCR) adjusted for liquidity of investment funds managed by the related asset manager; likely step-in amount is added to the denominator of the LCR. - Data sharing under an MoU (signed in 2014) enables daily computation of investment fund liquidity: - CVM provides granular data on portfolio of each 555 investment fund and on each fund TNA. - Data reconciles and cross-checks trade repository data on securities held by investment funds. - CVM provides liability data identifying fund category, enabling calculation of likely liquidity runoff ratios and liquidity needs. - Combined asset, liability, and trade repository data allow calculation of step-in risk for each investment fund and computation of an aggregate liquidity indicator. - The aggregate liquidity indicator was selected to enter the revamped “Financial Stability Map” monitored quarterly by the BCB’s Financial Stability Committee. *Source: cr18358-brazilfsap* ### EXECUTIVE SUMMARY _____________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Overview and sector size - Total investment fund assets under management (AUM) by Brazilian fund management companies reached R$3.57 trillion by the end of December 2016, representing roughly 55 percent of Brazil’s GDP. - Brazil’s fund management sector is the seventh largest globally. - 555 funds are predominant, representing approximately 90 percent of AUM. - Asset mix of 555 funds: fixed income funds approximately 65 percent of AUM; multi-market funds 20 percent of AUM. - Total AUM growth: from R$ 1,954,780 million in 2011 to R$ 3,573,335 million in 2016. - Interest rates: recent peak of 14.25 percent; declining rates have spurred investor interest in products other than fixed income. - Market concentration: the top 5 full administrators account for approximately 66 percent of the total AUM of 555 funds. ### Institutional framework and SRO role - Regulatory authority: Comissão de Valores Mobiliários (CVM) is the competent regulator for investment funds. - ANBIMA acts as a voluntary self-regulatory organization (SRO) and as the industry representative/advocacy body. - ANBIMA membership: 275 members; around 400 asset managers apply ANBIMA codes voluntarily. - ANBIMA Supervisory Department staffing: 45 staff. - Certification pass rate for ANBIMA exam: roughly one-third of entrants. - Sanctions available to ANBIMA include public admonition, a fine (capped at 100x the monthly membership fees of entities), removal of the ANBIMA “seal”, or expulsion. - Current issue: ANBIMA lacks a statutory basis for its SRO role, is not overseen by CVM, and CVM is not represented in ANBIMA decision-making bodies. - Resulting issues: duplication of supervisory effort; limited CVM oversight/input into ANBIMA’s risk-based methodology and supervisory priorities. ### Regulatory framework and supervision - Legal framework components: - Federal Law No. 6,385/76 (established CVM). - CVM Rule 438/06 (accounting rules for retail investment funds). - CVM Rule 539/14 (suitability rules; definitions of qualified and professional investors). - CVM Rule 555/14 (formation, registration and operation of mutual funds). - CMN Resolution No. 3,334/05 (rules for financial institutions acting as fund managers). - CMN Resolution No. 3,568/08 (foreign exchange controls for funds investing abroad). - Supervision observations: - CVM receives extensive data, with the most detailed, machine-friendly data covering 555 funds (about 90 percent of AUM). - Data gaps exist for non-555 funds; these funds (notably private equity and asset-backed securities funds) are typically closed-ended, less liquid, and subject to less detailed reporting. ### Risks, leverage, and liquidity management - Leverage: - There is no regulatory definition of leverage, impeding measurement and comparison across funds. - Absence of a regulatory cap on leverage may increase vulnerability in specific funds or groups of funds. - Recommendation and timeline: CVM should prioritize establishing a definition of leverage by the end of 2019, in coordination with IOSCO, and subsequently set a cap on leverage for individual funds and/or groups of funds managed by the same asset manager. - Liquidity management: - Framework is “strong and balanced” to prevent build-up of liquidity problems. - Current limitation: fiduciary administrators lack tools to deal with crystallized illiquidity and must move immediately to suspension of subscriptions and redemptions. - Recommendation: broaden the set of liquidity management tools available to fiduciary administrators to allow more flexible management of illiquidity situations. - CVM should monitor carefully the impact of the waterfall approach on second-round redemption effects where funds face unexpected redemption requests. ### Data, valuation, and fund termination - Data: - CVM should initiate discussions with market participants and stakeholders to bring data on non-555 funds to the same detailed and structured level as 555 funds. - CVM should cooperate with BCB, ANBIMA and B3 to encourage market participants to use SELIC instead of CDI as a benchmark. - Valuation and termination: - CVM’s rules on termination of investment funds are high-level and leave significant discretion to fiduciary administrators. - Recommendation: CVM should issue more detailed guidance on termination, taking into account the IOSCO Report on Good Practices for the Termination of Investment Funds. - CVM should be given a statutory basis to allow it to participate in the termination process. ### Resource adequacy and supervisory capacity - Staffing and resources: - The last open competition to recruit new CVM staff was held in 2010; CVM resources do not reflect sector size, growth, or importance of investment funds. - Consequence: limited staff means certain issues are not addressed as CVM would consider appropriate. - Recommendation: increase CVM resources as a matter of priority and give CVM more freedom to hire appropriate staff to reinforce independence. ### Key recommendations (priorities and addressees) - High priority: - A more extensive and formal set of cooperation arrangements between CVM and ANBIMA regarding investment fund supervision. — Addressees: CVM and ANBIMA. - Increase the resources of the CVM. — Addressee: Ministry of Finance. - CVM should prioritize ongoing work to establish a definition of leverage by the end of 2019, in coordination with IOSCO, then set a cap on leverage for a particular fund and/or for groups of funds managed by the same asset manager. — Addressee: CVM. - Medium priority: - Fiduciary administrators should have access to a broader range of liquidity management tools that can be put in place without requiring prior approval of unitholders. — Addressee: CVM. - CVM should monitor carefully the impact of the waterfall approach on second-round redemption effects in cases of unexpected redemption requests. — Addressee: CVM. - CVM should initiate discussions with market participants on how to gather more detailed and structured data on non-555 investment funds. — Addressee: CVM. - CVM should cooperate with the BCB, ANBIMA and B3 to encourage market participants to use SELIC instead of CDI as a benchmark. — Addressee: CVM. - CVM should issue more detailed guidance on the termination of investment funds and be given a statutory basis to participate in the termination process. — Addressee: CVM. *Source: cr18358-brazilfsap - EXECUTIVE SUMMARY* ### 11. ANBIMA’s role, both on rulemaking and supervisory activity, has expanded in recent ### 11. ANBIMA’s role, both on rulemaking and supervisory activity, has expanded in recent ### CVM and ANBIMA roles, staffing, and resources - Finding: ANBIMA’s role on rulemaking and supervisory activity has expanded in recent years, explained in part by ANBIMA’s relative freedom in setting its budget. - Finding: The number of staff in the CVM’s Office of Institutional Investors Supervision has not increased in line with the growth of the investment funds sector. - Finding: CVM staff are recruited through open competitions but the CVM does not control the timing; the last competition took place in 2010, preventing timely replacement of staff and resulting in significant staff vacancies. - Finding: Despite a risk-based supervisory approach, lack of resources means certain issues are not addressed as CVM would consider appropriate. - CVM total staff by category and year: - Analysts: 2013: 225, 2014: 249, 2015: 245, 2016: 235, 2017: 228 - Inspectors: 2013: 112, 2014: 119, 2015: 113, 2016: 108, 2017: 104 - Executive Agents: 2013: 129, 2014: 125, 2015: 121, 2016: 114, 2017: 110 - Total: 2013: 466, 2014: 493, 2015: 479, 2016: 457, 2017: 442 - Office of Institutional Investor Supervision staff by category and year: - Analysts: 2013: 35, 2014: 37, 2015: 36, 2016: 34, 2017: 29 - Inspectors: 2013: 1, 2014: 2, 2015: 2, 2016: 3, 2017: 4 - Executive Agents: 2013: 8, 2014: 7, 2015: 7, 2016: 6, 2017: 6 - Total: 2013: 44, 2014: 46, 2015: 45, 2016: 43, 2017: 39 - Recommendation: - The resources of CVM should be increased to reflect the significant number of entities under its supervision, the growth of the investment funds sector, and the sector’s role in Brazilian financial markets. - To reinforce CVM’s independence, the authority should be given more freedom to hire appropriate staff. ### Structure of Brazilian investment funds and main service providers - Finding: Brazilian investment funds are required to be structured as a condominium (a pool of assets); unitholders hold fractions and each unit confers one vote in the general assembly of unitholders. - Finding: Fiduciary administrators, asset managers, custodians, auditors, and other service providers are subject to decisions of the general assembly. - Fiduciary administrator (regulated by CVM Instruction 558/15): - Duties include preparation and disclosure of constitutive documents and periodic information; hiring and supervising all service providers; supervising compliance by the asset manager with regulatory framework, investment strategy limits and liquidity management policies; controlling subscriptions and redemptions by investors. - Asset managers: - Hired by fiduciary administrator; responsible for making and implementing investment decisions in accordance with the fund’s founding documents, CVM Instruction 558, and the instruction governing the specific fund type. - Custodians: - Responsible for safekeeping investment fund assets; covered by CVM Instruction 542. ### Investor categorization and distribution of AUM - Investor categories and criteria: - Professional investors: - Financial Institutions - Insurance companies - Pension funds - Individuals with more than R$10 million in financial assets - Investment funds, clubs (if managed by an asset manager authorized by CVM) and authorized market participants: registered representatives, asset managers (individual), analysts and advisors - Foreign investors - Qualified investors: - Professional investors - Individuals with more than R$1 million in financial assets - Individuals approved in exams or holders of certificates accepted by CVM for registration as registered representatives, asset managers (individual), analysts and advisors - Retail investors: all investors who are neither professional nor qualified - Finding: The categorization affects which types of funds can be marketed to each group. - AUM distribution figures (as presented in charts): - Distribution of AUM by Investor Segment (In percent): Institutional 39%, Corporate 15%, Private 15%, Retail 16%, Government 8%, Foreign/Others 7% - Distribution of AUM by Institutional Investors (In percent): Public Pension Funds 15%, Private Pension Funds 22%, Insurance 6%, Open Pension Funds 45%, Capitalization 1%, Investment Funds 11% ### Types of funds and investor access - Table excerpt: Investment Funds and Investor Profile (Group: 555) - Equity: Retail ✓, Qualified ✓, Professional ✓ - Fixed Income: Retail ✓, Qualified ✓, Professional ✓ - Foreign Exchange: Retail ✓, Qualified ✓, Professional ✓ - Multimarket: Retail ✓, Qualified ✓, Professional ✓ - Structured Private Equity: Retail ×, Qualified ✓, Professional ✓ - Structured Asset-Backed Securities: Retail ×, Qualified ✓, Professional ✓ - Structured Real Estate: Retail ✓, Qualified ✓, Professional ✓ - Structured National Film Industry Funding: Retail ✓, Qualified ✓, Professional ✓ ### Diversification and concentration limits - Finding: CVM specific instructions lay down portfolio concentration limits by issuer and asset type for 555 funds; limits must be applied jointly. - Example explanation: A fund may invest up to 100 percent of its NAV in securities issued by financial institutions authorized by BCB (per Table 5) but only up to 20 percent of its NAV in securities of a given financial institution (per Table 4), implying diversification across at least five different such institutions if investing fully in that class. - Table 4: Portfolio Concentration Limits by Type of Issuer (Instruction 555/14, Article 102 item) - I Financial Institution authorized by BCB: 20 (Percentage of Investment Fund NAV in a Single Issuer) - II Publicly listed company: 10 - III Investment Fund: 10 - IV Person fund or company not listed in the above items: 5 - V Federal Government: unlimited - Table 5: Portfolio Concentration Limits by Financial Asset Type (Maximum NAV (percent)) - 20 percent category: - Investment funds unit - Fund of funds unit - Units of investment funds exclusively targeted at qualified Investors - Units of funds of funds exclusively targeted at qualified investors - Real estate funds units - Asset-backed investment funds units - Asset-backed funds of funds units - ETFs units - Real Estate Receivables certificates - 5 percent category: - Units of investment funds investing in non-standardized credit receivables - Units of investment funds investing in other investment funds that invest in non-standardized credit receivables - Units of investment funds targeted exclusively at professional investors - Units of funds of funds targeted exclusively at professional investors - Unlimited category: - Federal Government Bonds - Gold (if negotiated at exchanges or other organized markets) - Financial Institutions Bonds - Securities other than those already listed in this table, provided they were publicly offered and in compliance with CVM rules - Publicly listed companies’ promissory notes, bonds and shares, if they were publicly offered in compliance with CVM rules - Derivatives ### Asset composition and valuation practices - Finding: Government securities are the predominant asset class for Brazilian investment funds; this concentration is a potential area of concern given Brazil’s government securities credit rating is below investment grade. - Aggregate asset compositions and total net assets (Data as of September 2017, Source: BCB): - Fixed-Income Funds: Total Net Assets (TNA): R$2.3 trillion - Multi-Market Funds: Total TNA: R$0.5 trillion - Equity Funds: Total TNA: R$0.1 trillion - Valuation practices: - Each fiduciary administrator must have a manual, published on its website, setting out valuation practices for liquid and illiquid assets; CVM verifies appropriateness as part of its risk-based supervision plan. - Funds must follow national accounting standards adherent to IFRS, aligning the Brazilian framework with IOSCO Principle 27. - Most funds calculate NAV and unit prices daily; fiduciary administrator is responsible. Less frequent calculation allowed only if consistent with dealing frequency and provided for in by-laws. - Pricing errors are treated by CVM as operational errors; any investor losses must be refunded by the fiduciary administrator. - CVM supervisory focus on valuation (2017–18 Supervision Plan): - Systematic analysis of auditors’ comments on funds’ financial statements, with follow-up requests for clarification. - Assessment of mark-to-market valuation methodologies published by fiduciary administrators. - Sample checks of valuations performed on assets of particular funds, selected based on risk parameters such as liquidity, use of models, and likelihood of conflicts of interest. ### Managing liquidity risk and large redemptions - Framework safeguards for 555 funds include: - Transparency: investor disclosure and specific regulatory reporting on liquidity. - Portfolio limits: diversification limits by asset type and issuer. - Policies and procedures: liquidity risk management and stress testing; redemption frequency must be consistent with investment strategy. - Fiduciary administrators are required to carry out stress tests that at least take into account: - Redemption pressures - Liquidity of the assets - Liabilities and conversion periods - Frequency appropriate to the fund’s characteristics, historical scenario variations, and current market conditions - Finding: CVM can request stress test results but does not carry out its own stress tests. - Suspension and EGM rules: - If material liquidity issue arises, fiduciary administrator may suspend subscriptions and redemptions. - If suspension lasts more than five days, an extraordinary general meeting (EGM) of unitholders must be called and held within 15 days. - EGM options include replacement of fiduciary administrator and/or asset manager; redemption in kind; lifting the suspension; creation of a side pocket; liquidation of the fund. - Recommendation: - It would be beneficial for fiduciary administrators to have access to a broader range of liquidity management tools, such as deferred redemptions, gates or side pockets, that could be put in place where appropriate in the best interests of unitholders, but without requiring unitholder approval at an EGM. This would give fiduciary administrators more flexibility to manage illiquidity without necessarily resorting to suspension. - Waterfall vs pro rata in asset sales under unexpected material redemptions: - Waterfall: liquidate most liquid securities first, then use cash to cover residual redemptions; can lead to regulatory passive breaches of portfolio concentration limits. - Pro rata: use cash and liquidate securities proportionally to their share in liquidity buffers. - Finding: CVM’s policy is not to apply penalties or sanctions for “passive breaches”; this may unintentionally encourage more redemptions if unitholders see the fund becoming less liquid. - Recommendation: If a fund experiences a serious liquidity shortage, CVM should carefully monitor the impact of the waterfall approach on second-round redemption effects and, if appropriate, reconsider its policy of not taking enforcement action against passive breaches of portfolio concentration limits. ### Leverage - Finding: Funds cannot borrow directly but can generate leverage via derivatives, repurchase, and securities lending activities. - CVM supervision: 2017–18 Supervision Plan includes leverage as a specific risk event; CVM monitors margin requirements imposed by B3 on exchange-traded derivatives and cross-checks against liquidity and redemption data provided by fiduciary administrators. - Leverage metrics and observations (no single regulatory definition of leverage): - The accounting ratio of assets to net capital for investment funds is around 103 percent. - Exposure to securities lending represents 0.5 percent of industry NAV. - Exposure to reverse repos represents 1.18 percent of industry NAV. - Required margin for derivative contracts represents 1.8 percent of industry NAV. 50 percent of the notional value of all derivatives is subject to margin deposits (exchange-traded derivatives). - The Gross Notional Exposure of all derivative contracts is equivalent to 71 percent of industry NAV (this does not take into account netting or hedging arrangements). - Finding: Leverage is low on average although pockets of higher leverage exist, primarily in exclusive-investor funds held by banks. Margin requirements set by B3 act as a brake. - Finding: There is no regulatory definition of leverage nor a cap on leverage for individual funds or groups of funds managed by the same asset manager. CVM has started work to develop a definition and hoped to reach a conclusion by the end of 2019. - Recommendation: - CVM should give due priority to its ongoing work to establish a definition of leverage by the end of 2018 and should coordinate with IOSCO. - As a second step, CVM should set limits on leverage that can be generated by a particular fund and/or by a group of funds managed by the same asset manager. ### Termination of investment funds - Finding: The decision to wind up a fund can only be taken by the general assembly of unitholders, which decides how the fund will be liquidated, timing, and whether in-kind redemptions will be used. - Finding: The auditor must give an opinion about the fairness of the winding-up process. CVM’s role is limited to receiving information on the outcome from the fiduciary administrator. - Recommendation: - CVM’s rules on termination are rather high-level and leave significant discretion to fiduciary administrators. CVM should issue more guidance to market participants on the termination process, taking into account the IOSCO Report on Good Practices for the Termination of Investment Funds. - CVM should be given a statutory basis to allow it to participate in the termination process. ### Authorization of firms - Finding: CVM is responsible for authorizing firms (principally fiduciary administrators and asset managers) to conduct fund management activities. - Finding: Specific criteria in CVM Instruction 558/15 include having fit and proper senior managers, establishing appropriate policies and structures for risk management, and submitting information on oversight of compliance and delegated activities. - Finding: Applications for authorization are handled by the Office of Institutional Investors Supervision at the CVM. *Source: cr18358-brazilfsap - 11. ANBIMA’s role, both on rulemaking and supervisory activity, has expanded in recent* ### 38. CVM relies mainly on off-site research for the assessment of entities against the ### cr18358-brazilfsap - 38. CVM relies mainly on off-site research for the assessment of entities against the ### Authorization and eligibility - CVM relies mainly on off-site research to assess entities against relevant eligibility criteria, using sources such as the database of the Brazilian Department of Federal Revenue and CVM’s internal registers. - Information submitted by applicants is kept on file and verified during on-site inspections as part of ongoing supervision. - Discussions are under way between CVM and ANBIMA for ANBIMA to have an enhanced role in the authorization process for asset managers; ANBIMA would carry out initial due diligence before submitting the file to CVM (in line with its current role on initial public offerings). - Potential outcome of discussions: CVM may put in place a fast-track procedure for authorization of applicants screened by ANBIMA. - It is possible for the same legal entity to be authorized by CVM both as a fiduciary administrator and an asset manager (these are known as full administrators). - The top 5 full administrators account for approximately 66 percent of the total AUM of 555 funds. - CVM requires proper separation between the two functions for full administrators. - Full administrators typically belong to financial conglomerates that include banking and insurance entities. - With the exception of ETFs, CVM does not assess eligibility criteria for investment funds before authorization. - Specific CVM instructions apply to particular fund categories setting limits on concentration by issuer and asset type. - Authorization is granted automatically when the fiduciary administrator files necessary documents (constitutive documents, designation of independent auditor, declaration of compliance). - For ETFs, CVM's pre-authorization assessment includes analysis of the index to be tracked (CVM Instrument 359 sets specific criteria). ### Benchmarks and recommendation - The overnight unsecured CDI benchmark is still widely used by market participants in Brazil despite being very lightly traded and not generally perceived to be representative of the true cost of funding for large banks relative to the much more active SELIC repo market. - Recommendation: The CVM should cooperate with the BCB and other relevant authorities to encourage market participants to use SELIC instead of CDI as a benchmark. ### Delegated management - The fiduciary administrator is responsible for selection of any third-party service providers needed for the proper functioning of the investment fund. - The fiduciary administrator is jointly liable with third-party service providers for investor losses due to operational failings, rule breaches, or enforcement action by CVM. - All services that can be delegated are activities regulated by the CVM. ### Custodians - Only financial institutions regulated by the BCB may act as custodians of investment funds’ assets; separate authorization from CVM is required. - CVM Instruction 542 requirements for custodians include: - Appropriate operational and technological capabilities to ensure confidentiality and quality of information. - Processes and IT systems that allow registration, processing and control of positions and custody accounts. - For physically held assets, maintenance of physical structures with restricted access and safety mechanisms to ensure integrity of securities. - All financial assets of a fund must be registered in a system registry, subject to custody or safekeeping by the central securities depository and held in specific accounts opened in the name of the fund. - Related party custody is permitted but CVM’s authorization procedure checks for appropriate safeguards against conflicts of interest. ### Foreign funds and investment limits - Distribution/marketing of investment funds in Brazil is regulated and restricted to entities domiciled in Brazil. - Common practice: establish a domestic fund that invests in the foreign fund to make foreign investment funds available to Brazilian investors. - Instruction 555 changes: flexibility for investments by Brazilian funds in foreign assets: - Funds open to professional investors can invest up to 100 percent in non-Brazilian assets. - Threshold drops to 40 percent for funds open to qualified investors. - Threshold is 20 percent for retail funds. - The average amount of total NAV currently invested in foreign assets is low (approximately 2.5 percent), suggesting the limits are sufficiently flexible. ### CVM’s supervisory approach - CVM applies a risk-based supervision approach using a matrix ranking “risk events” by probability and impact (impact measured as potential for damage to CVM’s objectives, considering number and type of investors affected). - Outcome feeds into the two-year Supervision Plan approved by CVM’s Board. - CVM develops thematic supervision plans focusing on new or innovative themes; the 2017–2018 Supervision Plan includes: - Verification of compliance by certain securitization vehicles; - Policies and procedures of fiduciary administrators to prevent money laundering; - Interconnectedness of investment funds with other financial market sectors (banking and pension funds). - Inspections data (Table 6: Number of Inspected Participants and Products): - Fiduciary Administrators / Asset managers: 2015 = 44; 2016 = 50; 2017 = 51. - Investment Funds: 2015 = 39; 2016 = 34; 2017 = 37. - These figures illustrate the need for CVM to be given additional resources. ### Use of regulatory reporting and liquidity monitoring - Fiduciary administrators of 555 funds must provide extensive information to CVM. - Daily data received: price of units, number of unitholders, NAV, AUM, subscription and redemption requests. - Monthly data: portfolio composition, a trial balance, value-at-risk, profile of unitholders (absolute numbers and percentage distribution of the fund’s net assets). - All data must be provided in a structured format using CVM’s electronic filing system. - Detailed portfolio holdings of all investment funds are made public on a monthly basis; derogations only allowed in specific cases and disclosure can be delayed for three months at most. - Reporting obligations for non-555 funds also apply (portfolio composition, profile of unitholders, audited financial statements) but not necessarily in the same structured format. - CVM is considering using data from B3 to get a better overview of real estate funds [not for publication]; asset-backed securities funds pose greater reporting challenges due to large number and high turnover of assets. - CVM monitors liquidity of 555 funds daily using: - Liquid Assets (LA): total value of assets transformable into cash in current market conditions within the fund’s redemption period. - Predicted Cash Outflow (PCO): total value of cash outflow predicted within the redemption period. - When PCO > LA, CVM asks the fiduciary administrator for an explanation and may use supervisory powers to ensure appropriate action (e.g., increase liquidity of holdings). - Recommendation: CVM should initiate discussions with market participants and other stakeholders to bring data on non-555 funds to the same level as 555 funds to prepare for any future investor shift toward non-555 funds. ### Enforcement - CVM enforces compliance with rules applicable to the investment funds sector. - Less material breaches: CVM issues a warning letter demanding an action plan and timeline. - More intrusive formal enforcement action (requiring CVM Board approval) can result in a warning, a fine, or removal of authorization. - Main sources of information on breaches: investor complaints or police investigations. - Table 7 (Number of Inspected Participants—Routine Versus On-Demand): - Routine: 2015 = 70; 2016 = 86; 2017 = 75. - On-Demand: 2015 = 38; 2016 = 10; 2017 = 38. - Note: On-Demand inspections arise from complaints or criminal investigations. - CVM carried out 19 enforcement actions that led to judicial proceedings over 2014–2016 for irregularities including unauthorized investment activity, churning of fund portfolios, and insufficient due diligence. - ANBIMA also plays a role in enforcement (see paragraph 13 and Box 1 referenced in source); in 2017 ANBIMA imposed 269 fines on entities within the investment funds sector. - The level of CVM enforcement activity should be considered alongside ANBIMA activity, highlighting resource constraints and lack of clarity in CVM–ANBIMA supervisory/enforcement relationship. ### Systemic risk monitoring and shadow banking assessment - CVM cooperates with the BCB to monitor systemic risk from the investment funds sector. - BCB monitoring tools focus on transmission channels between investment funds and banking sector: liquidity and interconnections. - BCB monitors investment funds’ claims on banks using a “connections matrix” consisting of financial connections registered in trade repositories (SELIC, Cetip, BM&F and Bovespa-CBLC) and uses register data shared by CVM to identify parties holding specific positions. - CVM shares data on significant shareholders of investment funds to help identify funds effectively owned by other entity types (e.g., insurance companies or pension funds), enabling monitoring of interconnectedness with non-bank financial entities. - Recommendation: The BCB and CVM should work together to assess the liquidity of the government bond market, paying particular attention to a possible spike in yields due to liquidity shocks to investment funds that could affect other financial sectors; analysis should also take into account investor protection concerns arising from concentration of investment fund assets in these securities. - BCB analysis of shadow banking: application of CVM-developed methodology excluded several fund categories (e.g., closed-ended exclusive-investor funds and equity funds); resulting exercise identified funds representing R$256.9 billion (i.e. about 10.9 percent of the total Brazilian investment funds industry) as potentially posing typical shadow banking risk. ### BCB/CVM work on “step-in” risk (Box 2) - “Step-in” risk: illiquidity of investment funds within financial conglomerates (banking, insurance, asset management) can create reputational pressure for banks to provide liquidity to related investment funds despite no statutory or contractual obligation. - BCB monitors bank-specific liquidity indicators that take step-in risk into account and aggregate liquidity indicators of the investment fund industry. - Bank-specific liquidity indicator: Liquidity Coverage Ratio (LCR) adjusted for liquidity of investment funds managed by the related asset manager. - The likely step-in amount (difference between liquidity available to the investment fund and liquidity needed in a stress scenario) is added to the denominator of the LCR to reflect resilience to liquidity pressures arising from related-party funds. - Data sharing under an MoU (signed in 2014) enables daily computation of investment fund liquidity: - CVM provides granular data on portfolio of each 555 investment fund and on each fund TNA. - Data reconciles and cross-checks trade repository data on securities held by investment funds. - CVM provides liability data identifying fund category (fixed income, equity, etc.), enabling calculation of likely liquidity runoff ratios and liquidity needs. - Combined asset, liability, and trade repository data allow calculation of step-in risk for each investment fund and computation of an aggregate liquidity indicator. - The aggregate liquidity indicator was selected to enter the revamped “Financial Stability Map” monitored quarterly by the BCB’s Financial Stability Committee. *International Monetary Fund — Brazil Financial Sector Advisory (excerpts).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18358-brazilfsap.pdf_