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Emerging Markets Research

May 2013
PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES AFTER PAGE 20.
Brazil Local Markets
Finding value in a controlled environment
Barclays | Brazil Local Markets

28 May 2013 1
CONTENTS
The fate of interventionism.......................................................................................................................... 2
Government bonds ........................................................................................................................................ 3
Interest rate market ....................................................................................................................................... 8
FX market ...................................................................................................................................................... 15
Local corporate debt (Brazilian debentures) ........................................................................................ 19
Taxation ......................................................................................................................................................... 20
Sources and references .............................................................................................................................. 21
Barclays | Brazil Local Markets

28 May 2013 2
Brazil Local Markets: Finding value in a
controlled environment
This guide aims to provide an introduction to the Brazilian local markets. We discuss
government and local corporate bonds, the interest rate market, and the FX market
and its derivatives. We describe the main instruments in the market and their
characteristics; liquidity issues; transactions costs; and taxation.
Brazil has the largest financial market in LatAm and one of the most developed in
EM. The government bond market, with USD910bn outstanding, has several
instruments suitable for each type of investor. The cash market benchmarks the
interest rate market, which is one of the most liquid local markets in EM. Liquidity is
also ample in the local FX market the USD/BRL future instrument is one of the
most active derivatives currency traded in EM.
The fate of interventionism
After seven years of strong and continuous growth of real GDP per capita, the Brazilian
acceleration episode fizzled out beyond 2010. Economic stabilization was sustained by an
inflation targeting regime, a floating exchange rate, and fiscal responsibility. In our view, the
microeconomic reforms implemented in the early years of President Lulas first mandate
and strong positive terms-of-trade shocks were the driving forces behind the acceleration.
However, the recent inability to restart the investment cycle when other Latin economies
that are facing the same global uncertainties are delivering much stronger growth rates
indicates that idiosyncratic issues are at play. Strong protectionism, interventionism, and
the lack of a consistent long-term growth program are weighing on investment decisions.
Moreover, the emphasis on short-term growth has limited the governments capacity to
respond to structural problems.
FIGURE 1
Government debt securities: Market size ranking (as of 2012 year-end)
0
2
4
6
8
10
12
14
U
S
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a
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a
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S
w
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P
o
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g
a
l
USD tr

Source: World Bank-IMF, Barclays Research
Even though there were no formal changes in policy making in recent years, the Brazilian
government modus operandi has in fact changed. The new normal in Brazil is a
combination of low interest rates, a smaller primary surplus coupled with a more
depreciated level of the currency. Sluggish global economic activity should make this stance
possible without a build-up of significant inflationary pressures.
Barclays | Brazil Local Markets

28 May 2013 3
But even on the inflation front, our view is that the crisis drove the BCB to allow inflation to
float more freely in the upper bound of the target (4.5% +/-2%). Although the BCBs sole
mandate is to keep inflation within the targets, we believe that its reaction function is
expanding and also incorporating real GDP growth as well as limiting BRL appreciation.
To fulfill this new expanded objective, it has incorporated macro-prudential and credit-
limiting measures to its toolkit. However, the 6.5% upper bound of the target remains a
hard ceiling in our view; and, to us, the main risk to maintaining this new normal is that
uncertainty could continue to weight on investments decisions, which will likely continue to
dampen potential growth.
Government bonds
According to World Bank-IMF, in 2012 Brazil had the eighth largest government debt
securities market worldwide and the second largest in EM (Figure 1), just after China. As
of April 2013, the outstanding was USD910bn based on the Brazilian Central Bank statistics.
It is also one of the most developed markets in the EM universe. There are three groups of
actively traded bonds: fixed rates (LTN and NTN-F), floating rates (LFT), and inflation-linked
(NTN-B). In the past few years, NTN-Cs issuance (IGP-M inflation-linked bond) has been
extinguished and the FX-linked bonds (NTN-D) were discontinued in 2002.
The great majority of the domestic bonded debt is issued through competitive auctions held
by the National Treasury, with multiple prices (except the NTN-B and the LFT auctions, which
use Dutch bid-pricing), through an electronic system. For each public auction, a National
Treasury Regulation is announced, making the offerings public. Each participant (banks,
brokers, distributors, and other institutions registered in the Selic) is allowed to submit up to
five bids. The other types of issuance are direct, used to meet specific requirements defined by
law, and public offerings to individuals. The traditional auctions are usually held on Thursdays.
The NTN-B auctions typically take place every other Tuesday. Public bond exchange and
purchase auctions are also held and normally occur on Wednesday.
Other types of auctions include purchase auctions and exchange auctions. In the former,
the National Treasury use the instrument to acquire securities transacted in the market in
order to smooth maturities and provide liquidity to the secondary market. In the exchange
auctions, the National Treasury offers new securities and receives, as counterpart, other
securities transacted in the market, which are previously defined in each auction legal
authorization.
Once issued, the bonds can be freely traded between the parties, forming the secondary
market of government bonds. The Brazilian government bonds are predominantly traded in
OTC market, with registration and settlement taking place at the Special System for
Settlement and Custody (SELIC). The bonds are often traded in calls arranged by brokers
and usually occur twice a day (morning and afternoon). There is segmentation in calls by
type of bonds (i.e., one for fixed-rate bonds (LTN and NTN-F) and one for inflation-linked
bonds, NTN-B).
LFT Letra Financeira do Tesouro
LFT is a floating-rate Treasury bill and may be traded with a discount or a premium.
Therefore, it can pay more for less than the effective Selic rate. It is priced as followed using
a convention of Brazilian business days:
( )252 1
d
rd
PC
P
+
=

Barclays | Brazil Local Markets

28 May 2013 4
And

=
|
.
|

\
|
+ =
dtMTM
dtbase i
i
Selic
V PC
252 / 1
100
1
Where:
P = Price
V = Nominal value
PC = Corrected price
rd = Discount rate
d = Business days to maturity
Selic = Accrued annual Selic rate between the trade date and the maturity date.
LTN Letra do Tesouro Nacional
The National Treasury bill is a short-term (from 2.0 months to 3.5years), zero-coupon fixed
rate bill. It is priced as a conventional zero-coupon bond using a convention of Brazilian
business days:
( )252 1
d
r
V
P
+
=
Where:
P = Bond price
V = Nominal value (usually BRL 1,000)
r = Effective annual rate (252 days)
d = Business days to maturity
FIGURE 2
LTN
Bond (Maturity) Coupon Yield to maturity Mod duration BRL bn USD bn
LTN (07-01-2013) 0 7.7 0.1 68.3 34.1
LTN (10-01-2013) 0 8.0 0.3 11.1 5.5
LTN (01-01-2014) 0 8.2 0.6 68.5 34.2
LTN (04-01-2014) 0 8.3 0.8 44.7 22.3
LTN (07-01-2014) 0 8.5 1.0 56.0 28.0
LTN (01-01-2015) 0 8.7 1.5 80.2 40.1
LTN (04-01-2015) 0 8.8 1.7 37.9 19.0
LTN (07-01-2015) 0 9.0 1.9 6.1 3.1
LTN (01-01-2016) 0 9.2 2.4 92.9 46.4
LTN (07-01-2016) 0 9.3 2.8 47.2 23.6
LTN (01-01-2017) 0 9.5 3.3 13.7 6.8
Total 526.7 263.2
Outstanding

Note: As of May 23, 2013. Source: Bloomberg, Barclays Research
Barclays | Brazil Local Markets

28 May 2013 5
NTN-F Nota do Tesouro Nacional Serie F
National Treasury note F Series is a long-term, fixed-rate coupon note (from 1y to 10y) and
is priced as follows:
( )
( ) ( )
(

+
+
+
+
=

=
252 /
1
252 /
2 / 1
1
1
1
1 ) 1 (
*
d
n
t
d
r r
Ct
V P
Where:
n = Number of coupon payment dates
d = Number of business days between the trade date and the coupon payment date t
Ct = Coupon defined on the issuance
V = Nominal value
r = Effective annual rate (252 days)
FIGURE 3
NTN-F
Bond (Maturity) Coupon Yield to maturity Mod duration BRL bn USD bn
NTN-F (01-01-2014) 10 8.2 0.5 38.8 19.4
NTN-F (01-01-2015) 10 8.5 1.4 4.8 2.4
NTN-F (01-01-2017) 10 9.3 2.8 73.7 36.8
NTN-F (01-01-2018) 10 9.5 3.4 16.0 8.0
NTN-F (01-01-2019) 10 9.7 3.9 3.2 1.6
NTN-F (01-01-2021) 10 9.9 4.8 32.6 16.3
NTN-F (01-01-2023) 10 10.1 5.6 24.8 12.4
Total 194.0 96.9
Outstanding

Note: As of May 23, 2013. Source: Bloomberg, Barclays Research
NTN-B/NTN-C Nota do Tesouro Nacional Serie B/C
The Treasury used to issue two inflation-linked securities: NTN-Bs and NTN-Cs. The former
have their principal indexed to IPCA (the official national consumer price index). They
usually have semi-annual payments of fixed-rate coupons on the indexed principal,
although there have been some zero coupon bonds issued with indexed principal (available
only in public offerings to individuals). NTN-Cs were similar to NTN-Bs, but with principal
indexed to IGP-M.
Until 2005, the market for NTN-Cs was substantially larger than that of the NTN-Bs.
However, demand for IPCA-linked securities has been increasing, given IPCAs central role
within the inflation-targeting regime. Furthermore, from a supply perspective, the
combination of the currency devaluation in 1999 and the high FX pass-through of the IGPM
led the Treasury to shift toward IPCA-linkers. In December 2006, NTN-Cs issuance has been
extinguished and, as of April 2013, NTN-Bs account for about 90% of the total outstanding
amount of inflation-linked securities (BRL700bn). Liquidity is often poor for NTN-Cs, as a
sizeable portion of the outstanding bonds are held by buy-and-hold pension funds, which
also have long-term IGPM liabilities acquired in the past.
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28 May 2013 6
NTN-B, on the other hand, trades up to USD 2.0bn on a daily basis. NTNs are quoted on a
yield basis using the Brazilian business/252-day count convention and annual
compounding. All IPCA linkers have 6% real coupons. However, due to the local convention,
the effective coupon c (paid every 6 months) is given by: ( ) 1 1 '
2
1
+ = c c , where c is the
annual coupon.
Linkers have their principal indexed from a base date that does not coincide with the
issuance date; it is set at July 15, 2000, to all NTN-Bs. Therefore, newly issued bonds start
with a large inflation adjustment and a nominal invoice payment necessary to acquire a
bond that is materially above par. The yield to price formula is given by:
(

+
+
+
=

=
n
i
tn ti
t
r r
c
I
I
P
1 0
) 1 (
1
) 1 (
` `
1000

Where t, ti and tn are the times (Brazilian business/252-convention) to settlement date,
coupon dates and the maturity date, respectively; ( ) 1 1 '
2
1
+ = c c is the effective
coupon;
0
I is the inflation index at the base date;
'
t
I is the current index level; r is the
quoted yield; and P is the current price of the bond.
Both inflation indices (IGP-M and IPCA)
t
I are updated only once a month and evolve as a
step function. To adjust the current price of the bonds correctly, one needs to account for
the accrued inflation from the last date the index was updated to the settlement date of the
bond (generally T+1). The market convention is to use the official Brazilian Association of
Financial and Capital Market Companies (ANBIMA) inflation forecast pro rata, so we have:
( )
N n
A t t
i I I
/ '
1+ =

where n is the number of Brazilian business days between the evaluation date and the last
day of the previous IPCA period coverage; N is the number of Brazilian business days
between the last day of the previous IPCA period coverage and the last day of the next IPCA
period coverage; and
A
i
is inflation as projected by ANBIMA. Special attention should be
paid to the dates when there are releases of other inflation indices, since they are generally
correlated with IPCA or IGPM or both. ANBIMA inflation projection might change according
to other data releases, affecting the value of the linkers.
IPCA and IGP-M Inflation
Brazil developed several inflation indices during its high inflation period. The most important
are IPCA (BZPIIPCA Index <go> in Bloomberg) and IGPM (IBREIGPM Index <go> in
Bloomberg). The IPCA (December 1993 = 100), calculated by the national statistics agency
(IBGE), is the official national consumer price index (and the measure of inflation targeted
by the central bank). IBGE publishes it around the 10
th
day of each calendar month covering
the period of the previous calendar month. In other words, the February index, released in
March, reflects average prices during February, and the m/m change for February
represents the full-month February average compared with that for January.
IBGE announced in late 2011 the new weighting structure for the IPCA inflation index valid
as of 2012. The index was constructed based on the latest consumption survey, taken in
2008-09, and reflects the consumption patterns of households with incomes of 1-40x the
minimum wage. As is standard in CPI index calculations, the index weights are fixed.
However, IBGE-reported weights move slightly each month, reflecting the changes in
relative prices.
Barclays | Brazil Local Markets

28 May 2013 7
Food/beverages, transportation and housing have the largest shares on the IPCA. The
importance of the food and transportation components is exacerbated by their high level of
volatility, as they are affected by swings in international food and energy prices. But with the
government controlling fuel prices, transportation has a smaller role in the fluctuation of
inflation. Geographical coverage comprises 11 metropolitan areas, with So Paulo having by
far the biggest weight of about one-third of the IPCA.
The IGP-M index (August 1994 = 100) published by the private Getulio Vargas Foundation
measures a broader set of prices. It consists of three measures: wholesale prices (60% of
the total); consumer prices (30% of the total); and construction costs, both materials and
labour (10% of the total). The IGP-M is also published monthly, around the 30
th
day of each
month. Instead of calendar months, it covers a period from the 21
st
day of a given month
through the 20
th
of the following month. The consumer price component tends to behave
similarly to the IPCA, but the wholesale price component is considerably more volatile,
partly because of the prevalence of raw foods in the index and partly because of exchange
rate movements, which can affect tradable goods prices significantly. As a result, inflation,
as measured by the IGP-M, fluctuates more widely than IPCA inflation. BRL changes have a
faster and higher pass-though into IGP-M than into IPCA.
FIGURE 4
NTN-C
Bond (Maturity) Coupon Yield to maturity Mod duration BRL bn USD bn
NTN-C (07-01-2017) 6 3.0 3.5 8.9 4.5
NTN-C (04-01-2021) 6 3.7 6.2 19.2 9.6
NTN-C (01-01-2031) 12 4.0 9.8 37.4 18.7
Total 65.5 32.7
Outstanding

Note: As of May 23, 2013. Source: Bloomberg, Barclays Research

FIGURE 5
NTN-B
Bond (Maturity) Coupon Yield to maturity Mod duration BRL bn USD bn
NTN-B (08-15-2014) 6 2.9 1.2 49.8 24.9
NTN-B (05-15-2015) 6 3.1 1.8 58.0 29.0
NTN-B (08-15-2016) 6 3.5 2.9 69.2 34.6
NTN-B (05-15-2017) 6 3.6 3.5 35.4 17.7
NTN-B (08-15-2018) 6 3.7 4.4 35.9 17.9
NTN-B (08-15-2020) 6 3.9 5.7 44.7 22.4
NTN-B (08-15-2022) 6 4.1 7.0 50.9 25.5
NTN-B (08-15-2024) 6 4.2 8.1 36.4 18.2
NTN-B (08-15-2030) 6 4.4 10.9 13.7 6.9
NTN-B (05-15-2035) 6 4.5 12.8 30.1 15.0
NTN-B (08-15-2040) 6 4.5 14.3 27.1 13.5
NTN-B (05-15-2045) 6 4.5 15.6 61.0 30.5
NTN-B (08-15-2050) 6 4.6 16.4 70.9 35.4
Total 583.2 291.4
Outstanding

Note: As of May 23, 2013. Source: Bloomberg, Barclays Research
Barclays | Brazil Local Markets

28 May 2013 8
NTN-D Nota do Tesouro Nacional Serie D
National Treasury note D Series is a FX-linked coupon note, which was discontinued in
2002.
Bloomberg references: BLFT <Govt>: LFT; BLTN <Govt>: LTN; BNTNF <Govt>: NTN-F;
BNTNB <Govt>: NTN-B; BNTNC <Govt>: NTN-C; AUCR BZ: Brazil Auction Results
Interest rate market
The Selic overnight rate is the volume-weighted average rate of one-day operations backed
by federal government securities. It is also the Brazilian base interest rate, and its target is
set at the Monetary Policy Committee (Copom) meetings. The overnight Selic rate is
calculated as:
FIGURE 6
Local debt composition

FIGURE 7
Non-resident position (% of the domestic debt)
NTN-B
35%
LTN
29%
LFT
22%
NTN-F
11%
NTN-C
3%
Other
0%


51,2
15,8
6,7
2,4
1,5
12,9
0
10
20
30
40
50
60
NTN-F LTN NTN-B LFT Others Total
%

Note: As of April 2013. Source: BCB, Barclays Research Note: As of March 2013. Source: BCB, Barclays Research
FIGURE 8
Local debt average maturity

FIGURE 9
Local bonds average daily traded volume
87
85
42
25
18
49
0
10
20
30
40
50
60
70
80
90
100
NTN-B NTN-C NTN-F LFT LTN Total
Months
Local debt average maturity


2,1
2,0
0,5
0,4
0,0
0,5
1,0
1,5
2,0
2,5
LTN NTN-B NTN-F LFT
USD bn
12 months average

Note: As of March 2013. Source: BCB, Barclays Research Note: Until March 2013. Source: BCB, Barclays Research
Barclays | Brazil Local Markets

28 May 2013 9

=
=

=
n
i
i
i
n
i
i
V
r V
Selic
1
1

Where Vi = ith Transaction volume
ri = ith Transaction rate
n = Number of daily transactions in the Selic
The CDI is a bond issued by financial institutions which back the transactions in the
interbank market. Thus, a CDI is issued on the settlement of each transaction in the
interbank market. One-day CDI transactions are called CDIs over, which are compounded
on a daily basis using a 252-business day year, or 21 business days per month.
DI futures
The DI futures contract works like a swap from floating rate into fixed rate. It is the most-
liquid interest rate instrument in the Brazilian market and is listed on the Brazil Mercantile &
Futures Exchange (BM&F Bovespa). The DI future underlying asset is the DI rate effective up
to the contracts expiration date, as measured by the capitalized daily DI over rates from the
first trading day to the last.
The price of one contract is BRL 100,000.00 discounted by the interest rate, and the rate is
expressed as an effective rate per annum based on a 252-business day year. Each contract has
a minimum price fluctuation of 0.1bp (for expirations in the first three contracts) and 1bp
beyond that. It expires on the first business day of the contract month, and the last trading day
is the business day preceding the expiration date. This particular rate convention has been
inherited from the hyper-inflation times, when inflation ran above 1% per day.
DI futures contracts are always available, with expiration falling in the first four months
subsequent to the current month and thereafter for each first month of a calendar quarter
(January, April, July, and October) following the maturity calendar of the cash market (LTN
and NTN-F). The DI contracts liquidity is closely related with the cash market structure,
hence, January contracts are usually the most liquid.
At the end of each trading day, a settlement price is calculated and compared with that of
the contract expiration. The difference is the daily settlement paid from one investor to
another. The daily settlement value for a short position in one contract is calculated
according to the following formula (settlement value for a long position is the negative of
short position value):
( ) P SP S
t t
= - For positions opened on the current day
( )
(
(

|
|
.
|

\
|
+ =

252
1
1 1
1
t t t t
DI SP SP S - For positions opened on a previous day
Where St = Daily settlement value in t; SPt = Contract settlement price in t;
The trading price, P, is calculated as follows:
( )
252
1
000 , 100
d
r
P
+
=

Barclays | Brazil Local Markets

28 May 2013 10
Where r = Traded interest rate in pp; d = Number of business days between the trading
day and the day before the expiration date; and DIt-1 = DI rate on the business day
preceding the day to which the trade corresponds.
The positions outstanding after the last settlement price are cash-settled by the BM&F
Bovespa on the expiration date by registering an offsetting transaction for the same number
of contracts. The cash settlement takes place on the following business day.
Margins are required for all investors holding open positions. Margin values shall be
updated daily by the BM&F based on margin calculation criteria for futures contracts, and
the following assets can be used to meet margin calls: cash, gold, shares of the Financial
Investment Fund (FIF), and, upon prior approval by the Exchange, federal government
bonds, private sector securities, letters of credit, shares of stocks, and equity fund units.
Transactions costs
Basic commission rate (BCR): Regular trading = 3.0%, day trading = 1.5%. For contracts
cash settled upon expiration date, the BCR will be the same as the one for the last
trading day.
Settlement fee: The value of the BCR on the last trading day.
Exchange fee: 1% of the BCR.
Registration fee: A fixed value established by the BM&F.
Common members shall pay no more than 75% of the BCR and the settlement fee, and
75% of other trading costs.
Institutional investors shall pay 75% of the exchange fee.
Trading costs shall be paid on the business day following the trading day.
Barclays | Brazil Local Markets

28 May 2013 11
FIGURE 10
DI futures as of May-23-2013
Contract Rate Contract price Bus days to maturity Open interest Volume Volume/open interest
Jun-13 7.28 99,832.80 6 660,638 74,535 11.3%
Jul-13 7.53 99,253.37 26 6,595,625 305,850 4.6%
Oct-13 7.93 97,252.43 92 709,841 39,275 5.5%
Jan-14 8.11 95,287.39 156 3,037,199 297,650 9.8%
Apr-14 8.22 93,423.77 217 771,837 27,045 3.5%
Jul-14 8.34 91,542.31 278 877,578 33,755 3.8%
Oct-14 8.44 89,528.96 344 87,494 1,500 1.7%
Jan-15 8.55 87,533.08 409 1,651,417 485,730 29.4%
Apr-15 8.65 85,664.66 470 367,297 9,305 2.5%
Jul-15 8.81 83,701.57 531 117,506 12,650 10.8%
Oct-15 8.90 81,738.40 596 46,577 1,525 3.3%
Jan-16 9.01 79,803.61 659 936,509 86,350 9.2%
Apr-16 9.06 78,052.05 720 66,384 1,055 1.6%
Jul-16 9.16 76,160.75 783 445,926 11,800 2.6%
Oct-16 9.19 74,389.50 848 21,881 235 1.1%
Jan-17 9.30 72,533.44 910 1,249,998 371,025 29.7%
Apr-17 9.34 70,838.56 973 36,874 3,575 9.7%
Jul-17 9.40 69,167.98 1,034 34,775 535 1.5%
Oct-17 9.40 67,621.13 1,098 7,170 100 1.4%
Jan-18 9.49 65,903.54 1,159 129,711 1,370 1.1%
Apr-18 9.50 64,450.16 1,220 4,375 0 0.0%
Jul-18 9.54 62,872.97 1,283 590 0 0.0%
Oct-18 9.58 61,311.51 1,347 160 0 0.0%
Jan-19 9.67 59,684.02 1,409 49,245 495 1.0%
Apr-19 9.66 58,411.82 1,470 1,315 0 0.0%
Jul-19 9.69 56,994.64 1,532 1,075 0 0.0%
Oct-19 9.72 55,527.97 1,598 120 0 0.0%
Jan-20 9.80 53,978.14 1,662 36,550 530 1.5%
Apr-20 9.80 52,754.01 1,724 1,120 0 0.0%
Jul-20 9.84 51,424.21 1,785 3,250 0 0.0%
Oct-20 9.93 49,906.22 1,850 1,860 25 1.3%
Jan-21 9.98 48,570.93 1,913 256,074 27,900 10.9%
Jan-22 10.10 43,768.30 2,164 28,149 535 1.9%
Jan-23 10.21 39,389.64 2,415 125,815 3,850 3.1%

Source: Bloomberg, Barclays Research
DI options
DI options are European options on one-day DI futures contracts. The holder of a DI call
(put) option has, at the expiration date, the right to buy (sell) one DI futures contract at the
strike price. The options are quoted in option premium, in BRL, up to two decimal places.
The DI options series are:
1. The underlying contract expires three months after the option expiration date;
2. The underlying contract expires six months after the option expiration date;
3. The underlying contract expires one year after the option expiration date;
Barclays | Brazil Local Markets

28 May 2013 12
4. The BM&F specifies the underlying contract expiration date.
The most-liquid contract months are those beginning a calendar quarter (January, April,
July, and October). DI options expire on the first business day of the contract month, which
is also the last trading day. On this day, the BM&F does not allow the opening of new
positions and day trading. Premiums are cash settled on the first business day immediately
subsequent to the trading day.
Upon exercise, the call (put) option holder buys (sells) the underlying DI futures contracts
from the writer. This transaction is then transformed into a long (short) position in DI rate,
thus, the short (long) position in price P is as follows:
( )252 1
000 , 100
d e
re
P
+
=

Where Pe = Exercise settlement value in P;
re = Option strike price in interest rate;
d = Number of trading days between the exercise date and the day before the
underlying contract expiration date.
All writers are required to hold margin accounts in accordance with BM&F regulations. The
following assets are eligible to meet margin calls: cash, gold, and, upon prior approval by
the Exchange, federal government bonds, private securities, letters of credit, equities, and
equity fund units.
IDI
The average one-day Interbank Deposit Rate Index (IDI) tracks the daily returns of the DI
rate. The index is used essentially as an underlying asset on call and put IDI options and is
calculated as follows:

|
.
|

\
|
+ =

1
100
1
1
t
t t
i
IDI IDI

Where IDIt = IDI value on date t;

FIGURE 11
DI yield curve as of May 23, 2013

6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
0 1 2 3 4 5 6 7 8
Years-to-Maturity

Source: Bloomberg, Barclays Research
Barclays | Brazil Local Markets

28 May 2013 13
IDIt-1 = IDI value on date t-1;
it-1 = DI rate expressed in pp per day, on date t-1 to seven decimal places.
On the first day of the transaction, the index is set at 100,000.00, accruing the DI rate from
the previous day until the final day of the transaction.
IDI options
IDI options are Asian options on interest rates. The payoffs from these options are
dependent upon the average short-term rate over the transaction period. They are similar to
European options in the sense that exercise is available only upon expiration. Hence, if a
positive cash settlement should result, IDI options are automatically exercised. They are
used essentially as hedge against interest rate exposure by the banks, hedge funds, and
large corporations.
The option is quoted as the premium in IDI points, with each index point worth BRL1.00.
The strike price corresponds to the IDI in BRL, which is released by the BM&F. The
expiration of IDI options is available on all months. Options expire on the first business day
of the option month, and trades until the last business day of the previous month. IDI
options are the most liquid in the BM&F.
The cash settlement of premiums comes about on the business day following the trading
day according to:
M P PSV =
Where PSV = Premium settlement value for each contract;
P = Option premium;
M = Value, in BRL, of each contract point, established by the BM&F at BRL1.00.
The cash settlement of positions upon exercise is calculated as follows:
( ) SP DI SV
S
=
Where SV = Cash settlement value upon exercise for each contract;
SP = Strike price;
IDIs = IDI value on the expiration date.
Transaction costs
Basic commission rate: Regular trading = 2.25%, day trading = 1.1%, and exercise =
1.1%.
Settlement fee: 1.1% of exercise value
Exchange fee: 0.9% of the BCR
Registration fee: Established by the BM&F.
Common members shall pay no more than 75% of the BCR and 75% of the registration
and exchange fees.
Institutional investors shall pay 75% of the registrations and exchange fees.
Interest rate swaps
In the Brazilian market, swaps are OTC instruments registered on the BM&F. On the
expiration date, the settlement value is calculated as follows:
Barclays | Brazil Local Markets

28 May 2013 14
( ) ( )
t t t
AIF IV AIF IV SV 2 1 =
Where SV = settlement value on date t;
IV = Initial value of the swap, in BRL;
IF1t = Accumulated indexation factor of the first instrument, in which the swap
buyer (seller) is long (short), on date t;
IF2t = Accumulated indexation factor of the second instrument, in which the
swap buyer (seller) is short (long), on date t.
There is usually no daily settlement of accounts, as is the case with futures contracts. In the
case of swaps, there is usually only one payment, which occurs on the expiration date. If a party
chooses to trade with a guarantee feature, in which the BM&F guarantees the party against
default risk, the BM&F requires that its counterparty maintain a margin account. The BM&F
accepts cash, federal bonds, gold, shares of the Financial Investment Fund, and, upon prior
approval by the Exchange, private securities, letters of credit, equities, and equity fund units.
IPCA-DI swap
IPCA-DI swap is the most-liquid swap in the BM&F Bovespa and is the most active market
among brokers. For this contract, one party pays an IPCA-indexed leg and receives a
floating rate (DI). The IPCA is released on a monthly basis by the National Bureau of
Statistics and Geography (IBGE).
Pre-DI swap
Pre-DI swap is an interest rate swap in which one party pays a fixed rate (Pre) and receives a
floating rate (DI), and the counterparty, the opposite. It works similar to a DI futures
contract, but without the daily settlement of accounts. Liquidity is very poor.
IGPM-DI swap
IGPM-DI swap is an interest rate swap in which one party pays an IGPM-indexed leg and
receives a floating rate (DI). The IGPM is released on a monthly basis by the Getlio Vargas
Foundation (FGV), and for this reason, IGPM-DI swaps must expire in no more than 30
calendar days.
USD-DI Swap
USD-DI swaps are the most-liquid FX swaps. For this contract, one party pays a USD-linked
leg and receives a floating rate (DI). The underlying BRL/USD rate is the one traded at the
free rate foreign exchange market for cash delivery, is settled in two days (D+2), and
calculated and disclosed by the Brazilian Central Bank. The official rate is released on the
PTAX800, option 5, and offer or bid rates are accepted in the swap contract.
Bloomberg references
BMEF: BM&F page
BTMM BZ: Brazil treasury and money markets
ODA <Cmdty> CT: DI futures table
IDIX3 <Index> OMON: IDI options monitor
PREDIXXX <Index>: Pre-DI swap, where XXX is the tenor of the contract in a daily basis
IGPDIXXX <Index>: IGPM-DI swap, where XXX is the tenor of the contract in a daily
basis
DOLDIXXX <Index>: USD-DI swap, where XXX is the tenor of the contract in a daily basis
Barclays | Brazil Local Markets

28 May 2013 15
FX market
The official USD/ BRL spot rate for most financial operations in the Brazilian market is the
PTAX rate, which is calculated as the volume-weighted average rate in the interbank
market. The Brazilian Central Bank is responsible for the calculation and disclosure of the
PTAX rate.
USD/BRL spot
The USD/BRL pronto is a BM&F USD spot market. The USD/BRL spot rate is also traded
over the counter. USD/BRL trades should be closed at the best available market prices. The
minimum volume for this is USD50,000 and the maximum is USD10,000,000. Settlements
of floor-traded transactions are available on the first (t+1) and the second (t+2) business
day following the trading day. t+2s are the only transactions with significant trading volume,
having the same settlement period as OTC trades. Moreover, most of the interbank market
liquidity is on the USD/BRL casado (which is the difference between the first USD/BRL
future and spot rate) and not in the USD/BRL pronto.
USD/BRL futures
Within the Brazilian market, the USD/BRL future contract is the most-liquid FX instrument
listed on the BM&F. The underlying asset of a USD/BRL futures contract is the average
BRL/USD offer rate for cash delivery, which is released by the central bank. The market is
very liquid but is highly concentrated on the first contract month, usually accounting for
nearly 80% of the total market open interest and more than 90% of volume.
Contracts are quoted in BRL per USD1,000 to three decimal places, with a minimum price
fluctuation of BRL0.50. Each contract has a value of USD50,000 and all months, up to a
maximum of 24 contract months, are available for trading. Expiration of the contract occurs
on the first business day of the contract month, with the business day preceding the
expiration representing the last trading day.
USD/BRL futures contracts are required to settle daily at the end of each session based on
the days settlement price, and cash trades are settled on the following business day. For the
first two contract months, the settlement price is calculated as the average price for all
trades within the last 15 minutes of the session. This price may also be settled based on an
arbitrated price by the BM&F. For all other contract months, the settlement price is
established on the closing call.

FIGURE 12
USD/BRL future

1,60
1,70
1,80
1,90
2,00
2,10
0
200
400
600
800
1.000
1.200
jan/12 abr/12 jul/12 out/12 jan/13 abr/13
Volume (k, 20bd MA) Open Interest (k, 20bd MA) USD/BRL 1st Future (RHS)

Source: Bloomberg, Barclays Research
Barclays | Brazil Local Markets

28 May 2013 16
The variation margin of a long position in one BRL/USD futures contract is calculated as
follows:
( ) 50 = P SP DS
t t
- For positions opened on the current day
( ) 50
1
=
t t t
SP SP DS - For positions opened on the previous day
Where DSt = Daily settlement value in time t;
SPt = Contract settlement price in time t;
P = Trading price.
As each contract is quoted on a USD1,000 basis, the daily settlement is multiplied by 50,
therefore, it is worth USD50,000. Those positions outstanding after the last settlement price
are cash-settled by the BM&F. This occurs on the expiration date by registering an offsetting
transaction for the same number of contracts. Cash settlement takes place on the same day
as the expiration date. The cash settlement value is calculated through the following
formula:
( ) 50 1000 = USD SV
Where SV = Cash settlement value for one contract;
USD = The average BRL/USD offer rate for cash delivery (underlying asset).
Margins are required for all investors holding open positions and follow the same criteria as
the DI futures.
Transaction costs
Basic commission rate: Regular trading = 0.12%, day trading = 0.06%
Exchange fee: 1.47% of the BCR.
Registration fee: A fixed value established by the BM&F.
Common members shall pay no more than 75% of the trading costs.
Institutional investors shall pay 75% of the fees.
Trading costs shall be paid on the day of business following the trading day.
USD/BRL options
BRL/USD options are traded on the BM&F and are European currency options, thus having
automatic exercise upon expiration. The underlying asset is the BRL/USD rate for cash
delivery, which is settled in two days (D+2); traded in the foreign exchange market; and
calculated and published by the central bank through the PTAX800, option 5, closing
offer rate. The option is quoted as the option premium in BRL per USD1,000 to three
decimal places. The BRL/USD option contract size is USD50,000. The options expire on the
first business day of the contract month, the last trading day is the last business day of the
preceding month.
Premiums are cash settled on the first business day subsequent to the trading day, as
follows:
50 = P SV
Where SV = Premium settlement value per contract;
Barclays | Brazil Local Markets

28 May 2013 17
P = Option premium.
Upon exercise, the proceeds are credited to the option holder and debited to the seller. The
exercise cash settlement for each contract is calculated as follows:
( ) | | 50 1000 = K USD EV
Where EV = Exercise cash settlement value per contract;
USD = BRL/USD rate (underlying asset) on the day before the expiration date;
K = Strike price.
The BM&F requires that all option writers hold margin accounts and follow the same criteria
of BRL/USD futures.
DDI futures and FRA
The DDI futures contract or Cupom Cambial works in the same manner as a USD-DI
swap. The underlying asset is the spread between the accumulated DI rate and the
BRL/USD PTAX rate variation from the business day preceding the trade date and the last
trading day. The major difference between a DDI futures contract and the USD-DI swap is
that the first is traded in the BM&F and the other is an OTC product. Moreover, it also worth
highlighting that liquidity in the DDI market is on the Cupom Cambial FRA, not in the DDI.
By the end of the day, the Cupom Cambial FRA becomes two legs of DDI, but liquidity is
mainly on the FRA. The market trades the FRA to reduce the PTAX/ FX swap risk.
The price of each DDI futures contract corresponds to USD100,000 discounted at the
spread mentioned above. Based upon 360 days, this spread is expressed as a percentage
per annum, up to three decimal places. Contract months are available in months that start a
quarter, as well as in the first four months subsequent to the current quarter. DDI futures
expire on the first business day of the contract month, with the last trading day being the
last business day of the month preceding the contract month.
As with DI and USD/BRL futures, DDI futures require a daily settlement of accounts, also
known as the variation margin. Trades are quoted in rate, which means an investor hoping
for a spread increase between the DI rate and the USD/BRL variation should take a long
position in DDI futures. For the purpose of settlement, long and short positions quoted in
rate are transformed into short and long positions in price, respectively.
The variation margin of a short position (in rate, hence long in UP) in one DDI futures
contract is calculated as follows:
( )
1
=
t t t
USD P SP S - For positions opened on the current day
( ) | |
1 1
=
t t t t t
USD IF SP SP S - For positions opened on the previous day
Where
t
S
= Daily settlement value in time t;

t
SP = Contract settlement price in time t;

1 t
USD = BRL/USD Ptax rate in time t-1;
P = Trading price, calculated as:
Barclays | Brazil Local Markets

28 May 2013 18
1
360
000 , 100
+ |
.
|

\
|

=
n
r
P

Where
r = Traded interest rate in pp;
n = Number of calendar days between the trade date and the last trading day.
Ft = Indexation factor in time t, calculated as follows:
( )
k t
t
m
j
j t
t
USD
USD
DI
F

=

+
=
1
1
252
1
1

Where
DIt-j = DI rate on the j-eth business day preceding the trade date t;
m = Number of reserves between t and the previous trade date;
USDt-k= BRL/USD Ptax rate on the day prior to the last trading session preceding
the variation margin date.
If S
t
is positive, the investor with the long position shall pay the daily settlement value to the
seller. Cash settlement takes place on the following business day and the settlement price is
cash-settled by the BM&F on the date of expiration by registering an offsetting transaction
for the same number of contracts.
Margins are required for all investors holding open positions. Margin values shall be
updated daily by the Exchange, based upon margin calculation criteria for futures contracts.
Transaction costs
Basic commission rate (BCR): Regular trading = 4%, day trading = 2%. For contracts
cash-settled upon the date of expiration, the BCR shall be the same as that for the last
trading day.
Exchange, registration, and permanence fees are charged by the Exchange, and
calculated by the BM&F.
Common members shall pay no more than 75% of the trading costs.
Institutional investors shall pay 75% of the fees.
Trading costs shall be paid on the day of business following the trading day.
Bloomberg references
BRL <Curncy>: BRL Spot
UCA <Crncy> CT: BRL/USD futures table
EVA <Crncy> CT: DDI futures table
GDA <Crncy> CT: FRC contracts table
DCY <Crncy> OMON: BRL/USD options monitor
BRL <Curncy> VOLC: BRL volatility comparison
Barclays | Brazil Local Markets

28 May 2013 19
Local corporate debt (Brazilian debentures)
Brazilian debentures are tradable local corporate debt securities issued by Brazilian
companies. In the last three years, approximately BRL180bn of debentures (BRL80bn of
which was in 2012) has been issued, but daily liquidity is still poor. In general, debenture
spreads over government bonds are not as attractive as in the USD bond market, although
that is partially a function of the shorter average tenor in the debentures market. However, a
key attraction of the debentures market is that the issuer base has very little overlap with
the USD-denominated corporate bond market (we count only six issuers that are present in
both), thus offering access to dozens of credits not available in the latter.
The market for corporate debentures in Brazil is still underdeveloped, with limited interest
from foreign investors. This largely reflects low liquidity and the fact that only a handful of
issues currently provide income tax and IOF exemption for foreigners (from which they do
benefit when buying local government debt).
In late 2010, however, the Brazilian government announced a set of measures to encourage
long-term financing in Brazil (Law 12,431/2011 Art. 1 and 2, and MP 7,632/2011) by
creating incentives to foster investment projects in the country. The measures were
structured in two main parts: tax incentives for long-term corporate debentures earmarked
for investment projects and the creation of a fund to stimulate the liquidity of those bonds
in the secondary market (although this fund never became operational).
Through those measures, households and foreign investors purchasing local corporate
debentures that meet certain criteria became exempt from income taxes and the IOF tax
(6% previously levied on FX transactions required to bring foreign currency onshore). The
main criteria for qualification are that securities must be either fixed-rate or linked to IPCA
or TR (but not those indexed to DI), have a minimum duration of four years and have the
use of proceeds linked to an investment project.
These measures were expected to attract foreign investors and increase trading liquidity in
this market, much the same way that tax exemption for foreign investors is credited with
helping foster the development of the local government debt market since 2006. Moreover,
they should ease some long-term savings constraints in the economy. So far, however,
there are few signs that the measures have had the desired effect (only a handful of
debenture issues so far have obtained proper qualification for the full tax exemptions).
FIGURE 13
Brazilian fixed income market

FIGURE 14
Private fixed income market: Exposure by type of return
Govt Bonds
54%
CDs
25%
Corporate
Debt
15%
Other Priv.
Cred. Instr.
6%


89%
2%
2%
1%
6%
1%
11%
DI Fixed-Rate
TR-Linked Selic-linked
Inflation-linked Other

Source: Anbima, Barclays Research Source: Anbima, Barclays Research
Barclays | Brazil Local Markets

28 May 2013 20
For debentures that do not qualify for tax exemption based on the above criteria, investors
pay 15% income tax if not domiciled in tax havens and 15-22.5% if domiciled in a tax haven
(they pay 2.5pp less for every six months of additional holding period, down to the limit of
15%). In addition, they pay an IOF tax on debentures trading (this is not the same IOF tax
that is levied on incoming FX transactions) done within the first 30 days from purchase,
which is levied as percentage of realized total return starting at 97% for a 1-day holding
period and falling linearly to zero after day 30. Local funds (pension funds and asset
managers) are exempt from income taxes and IOF on debenture trading, as these are levied
at the individual, not the fund level.
According to ANBIMA, the fixed income market (private and government) is USD1.8bn (as of
April 2013) and the government has by far the largest presence, accounting for 54% of the
market share. The rest is largely concentrated in CDs and corporate debt, which comprise
25% and 15%, respectively, of the fixed income market (Figure 13). The majority of private
fixed income market (89%) is linked to the DI rate (Figure 14), while the rest is concentrated in
inflation-linked securities, which comprise 6% of the private fixed income market.
In terms of trading and settlement, foreign investors need to set up a 2689 account and
appoint a custodian and legal/tax representative locally, a process that typically takes 2-5
days. Alternatively, they can get exposure to debentures through credit-linked notes (CLN)
or total return swaps (TRS), both of which are subject to IOF tax. Settlement through CETIP
is T+1, and since the index is not known upfront, investors agree on a spread on the trading
date and settle based on the index as of the settlement date.
Taxation
Local residents in Brazil pay withholding tax of 15-22.5% on the income from bonds, with the
precise bracket depending on the holding period (22.5% if held for less than 180 days; 15%
for periods above 720 days; and intermediate rates for holding periods in between). Since early
2006, the withholding income tax rate applicable to sovereign local bonds has been set to zero
for foreign investors who are not in tax havens (see www.receita.fazenda.gov.br for a list of
these). Thus, qualifying foreign investors are exempt from withholding taxes. Non-resident
investors domiciled in tax havens are taxed at the same rates as local investors.
We note that a zero tax rate is different from a non-existent tax. Any new tax in Brazil has to
be approved by Congress , with all the associated political cost. Therefore, it is much simpler
for the Executive to raise a rate when the tax already exists. The IOF tax on foreign capital
flows is a good example. In October 2009, the government raised the IOF tax for fixed
income to 2% from 0%; in October 2010, it raised it again to 4%, and hiked it to 6% less
than 30 days later. The 6% IOF tax is levied on the settlement of exchange operations when
the money enters the country to be invested in the Brazilian financial and capital markets.
The tax is now levied on all fixed-income inflows (except long-term earmarked
infrastructure debentures) and is collected only on the way in foreign direct investments
has always been exempt of the IOF tax, and in December 2011, the government reduced to
zero the IOF tax levied on foreign equity inflows from 2.0%. There is no discrimination
between long- and short-term flows.
In July 2011, the government also announced a new IOF tax on local USD derivatives
markets. It is now levied on all derivatives contracts whose settlement is influenced by FX
changes (i.e., USD options, futures and FRAs), so it will not be applied to local deposit rates,
commodities or other contracts. The 1% IOF is also levied on domestic investors to prevent
increases in short USD positions. Specifically, acquisition or sale of an exchange derivative,
when it results in the rise of the short position or reduction of the long position that is
higher than USD10mn in one day, there is 1% IOF tax on the notional value of the operation.
Barclays | Brazil Local Markets

28 May 2013 21
So, for example, if an increase of USD11mn occurs in the short position, the 1% will be
applied to USD1mn.
These measures were aimed at containing BRLs appreciation, given government concern
with the performance of the industrial sector and growth in the country. At current levels of
the BRL, however, we do not expect new FX measures.
Taxation Summary (Foreign investors who are not in tax havens)
Income tax
15% on capital gains and other income earned on money market instruments, including
CDs, corporate bonds and fixed income funds.
10% on swaps and equity funds.
Exempt on capital gains and income earned on government local bonds (or funds with
at least 98% of the AUM in government bonds), earmarked infrastructure debentures
(or funds with at least 85% of the AUM in earmarked infrastructure debentures),
venture capital funds, and derivatives traded in currencies and equities.
IOF Tax
6% IOF tax on foreign capital flows.
1% on the notional value of contracts on acquisition or sale of FX derivatives when it
results in the rise of the short position or reduction of the long position.
Short-term transactions on government bonds, fixed Income investment funds and
bank deposits. 1% per day on (1-d/30), where d is the number of days between
investment and the remittance of funds, charged over profits from fixed income
investments. Levied on investments unwound within 30 days of the investment date.
Exempt earmarked infrastructure debentures (or funds with at least 85% of the AUM in
earmarked infrastructure debentures), FIP/FIC-FIP/FIEE, acquisition or subscription of
stocks in public offerings, stock and derivatives, in exchange venue.
Sources and references
Brazilian Central Bank: http://www.bcb.gov.br/?ENGLISH
National Treasury: https://www.tesouro.fazenda.gov.br/en
The BM&F Bovespa Mercantile & Futures Exchange:
http://www.bmfbovespa.com.br/en-us/home.aspx?idioma=en-us
Federal Revenue and Customs Administration: http://www.receita.fazenda.gov.br
CVM Securities and Exchange Commission: http://www.cvm.gov.br/ingl/indexing.asp
ANBIMA - National Banks Association: http://portal.anbima.com.br/Pages/home.aspx
IBGE Brazilian Institute for Geography and Statistics: http://www.ibge.gov.br/english/
FGV Getulio Vargas Foundation: http://portal.fgv.br/en
IPEAData - Economic Research Database: http://www.ipeadata.gov.br/
Brazil: Excellence in Securities Transactions: http://www.bestbrazil.org.br/
Barclays | Brazil Local Markets

28 May 2013 22
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We, Ivan Fernandes, CFA, Guilherme Loureiro and Marcelo Salomon, hereby certify (1) that the views expressed in this research report accurately reflect
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