Brazil Covered Bonds

1 Who is the issuer?
  • Special Purpose Entities (SPE)
  Comments: The LIG is a transferrable, freely tradable security issued directly and exclusively by financial institutions approved by the Central Bank of Brazil (“BCB”) and registered with a central depositary, also approved by the BCB. Brazilian financial institutions are regulated by the National Monetary Council in its capacity as the collegiate regulator of the National Financial System, and by the Central Bank of Brazil which also supervises them.
2 Does the bondholder have recourse to the credit institution?
  • Yes, direct
3 Who owns the cover assets?
  • The issuer directly
  Comments: In addition to the issuing institution’s direct responsibility for their redemption, LIGs are collateralized by financial assets owned by the financial institution and which must be identified and segregated from its regular assets, thereby comprising segregated assets referred to as the Asset Portfolio. Although these remain under the management of the issuing institution, they must have their own controls and bookkeeping. The composition of the Asset Portfolio must comply with the specifications and limits stipulated in the law and regulations already mentioned, and their management by the issuing institution is subject to monitoring by a Fiduciary Agent approved by the monetary authority for that purpose, in addition to supervision by the Central Bank of Brazil of both the role of the issuing institution and that of the trustee.
4 Is the issuer the originator of the assets?
  • Yes
1 Are the bonds governed by a special covered bond Legislation?
  • Yes
2 What is the legal framework for bankruptcy of the issuer of covered bonds?
  Comments: In the case of intervention, liquidation or even bankruptcy of the issuing institution, management of the asset portfolio is immediately transferred to the Fiduciary Agent, who will have full and wide-ranging powers to manage it, in addition to redeeming the LIGs with the respective investors who will also become involved in this process through a general meeting specifically convened by the Fiduciary Agent.

Global comments for this chapter

The key legal effect of the fiduciary agent regime and the attendant asset segregation is the absolute ring-fencing in relation to the issuing financial institution’s regular assets. So, in the event of one of the situations described above, the trustee takes over management of the asset portfolio in order to redeem the LIGs, thereby ensuring that those assets will not be affected either by any administrative intervention procedures or extrajudicial liquidation by the monetary authority, or by the bankruptcy court proceedings, being therefore exempted from competing with the issuing institution’s other creditors, whether of an unsecured, fiscal or labor law nature.
1 What types of assets may be included in cover pools?
2 What is the geographical scope for public sector assets?
3 What is the geographical scope for mortgage assets?
4 Are regular covered bond specific disclosure requirements to the public mandatory?
1 LTV is calculated using which valuation?[4]
2 Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
3 Do bondholders get the benefit of that portion of the loan which exceeds the LTV cap?
4a Is there an LTV cap which makes the entire loan ineligible to be put in the cover pool (if yes, specify)?
4b Is there an LTV cap which would require a loan to be removed from the cover pool?
5 Is there any additional LTV limit on a portfolio basis?
Exposure to market risk
1 Is exposure to market risk (e.g. interest rate, currency risks) required to be mitigated by law or contract?
2 What is the primary method for the mitigation of market risk?
3 If the answer to the above question on market risk mitigation is “Use of derivative hedge instruments”, please specify whether those instruments are entered into:
4 What type of coverage test is applied?
5 What is the frequency of coverage calculations?
6 What types of stress scenarios are applied?
7 What is the frequency of stress test calculations?
Exposure to liquidity risk
8 Is exposure to liquidity risk required to be mitigated by law or contract?
9 What is the primary method for the mitigation of liquidity risk on interest payments?
10 What is the primary method for the mitigation of liquidity risk on principal payments?
11 Is there any grace period in case of a breach of liquidity risk mitigants?
12 What is the consequence of not fixing a breach of liquidity risk mitigants?
Monitoring of exposures to market and liquidity risk
13 Who monitors the maintenance of coverage tests?
14 Are there any regular public reporting requirements for market and liquidity risk?
15 Is mandatory minimum overcollateralisation required?
16 What is the level of minimum mandatory overcollateralisation?
17 If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected?
18 Is there any grace period in case of a breach of the coverage test?
19 What is the consequence of not fixing a breach of the coverage test?
1 Is a special license required for the issuing of covered bonds?
2 Are there special reporting duties of the covered bond issuer to the supervision authority concerning covered bonds and the cover pool, which go beyond the regular banking supervision?
3 What is the role of the banking supervision regarding covered bonds?
4 Is there a special role of banking supervision in crisis regarding covered bonds?
5 Is there a cover pool monitor independent from the issuer?
6 If there is an independent cover pool monitor, what are its duties?
1 Do covered bonds automatically accelerate when the credit institution goes insolvent?
2 What is the cover pool?
3 How are the covered bondholders protected against claims from other creditors in case of insolvency of the issuer?
4 Is there recourse to the credit institution’s insolvency estate upon a cover pool default?
5 Are there provisions that require derivatives to continue in case of insolvency of the credit institution?
6 If derivatives are permitted in the cover pool, what is their ranking?
1 Does the covered bond fulfil the criteria of UCITS 52(4)?
2 For further information regarding the compliance to the criteria of Article 129 of the Capital Requirements Regulation (CRR), please see the following links:
3 Are listed covered bonds eligible in repo transactions with the national central bank?
4 Are there any special investment regulations regarding covered bonds?
1 Link to National Association representing covered bond interests
2 Link to national regulators and supervisors
3 Fact Book Country Chapter
4 Hypostat Country Chapter