Brazil’s capital markets regulator, the CVM, has published a request for comment on proposed modifications to the regulatory framework of asset-backed securities. The rating agencies say the changes would be credit positive as they address recent issues surrounding commingling risk (between the seller and the ABS) and create a better distinction and definition of the roles of trustee and custodian in such structures.
The changes would apply to the 300-plus Fundo de Investimento em Direitos Creditórios vehicles currently in operation. The majority of the FIDC transactions already have strong governance but the strengthening of the rules would apply retrospectively to all transactions, giving investors greater confidence.
Recent financial irregularities have prompted the changes. Most recently, Banco Cruzeiro do Sul has reported "accounting irregularities". The bank turned to the FIDC market for funding after being frozen out of the local bond markets as investors became wary of medium-tiered Brazilian bank credits. The bank issued FIDCs, mostly securities related to consumer payroll loans, in which the function of custodian and trustee are performed by entities within the bank’s parent group.
To enhance confidence in the structure, asset managers such as BRZ had already been structuring their own ‘exclusive FIDCs’, which enshrine the separation of duties and are structured so that monies held in deposit and all revenues flow into accounts titled to the securitization, bypassing originators’ accounts. "These changes are music to our ears because we have been clearly separating the roles of governance within our structures for years," says Allan Hadid, chief executive and partner at BRZ Investimentos.
However, even if these regulations are adopted and increase the security of these products there remain structural differences that have an impact on the economic performance. "There are still other types of conflict of interest," says Hadid. "For example, we hired a credit consultant to originate [inhouse] because typically originators take a spread on the yield between sourcing assets and placing them into the securitization," says Hadid. "In our FIDCs the fund gets the yield at origination and the originator’s money comes not through the spread but from the subordination [equity portion] in the FIDC – and in that way the economic interest of investors and the originator is aligned. In this way, we prevent a conflict of interest and we are also originating at a higher rate for the fund."
The application of these rules to current deals could be tricky operationally, especially in the payroll loans asset class. "I just hope those difficulties don’t lead to changes in what’s been proposed, because they are extremely positive," says Johann Grieneisen, analyst in Moody’s structured finance group in São Paulo. "The FIDC market is the sister of the interbank market; if you clean up FIDCs, it will create ample interbank liquidity because banks will have no fear of buying the securitization of other banks’ loan books."
Grieneisen notes that the new rules will prevent monies flowing through the sponsor on the way to the securitization, and therefore avoid sponsor contamination from fraud and from straightforward business failure.
