Brazil
Brazil is hogging the limelight from its South American neighbours. But, although reforms are in full swing, there is still work to be done

The big dog of the Latin American market, Brazil is showing off its cultural, athletic and celebratory prowess as it hosts the 2016 Olympic games in Rio. Although its funds services offering may draw less universal attention, Brazil is also leading the way in administration in the region, attracting more and more attention from the regulators, and prompting service providers to buck up their ideas.

While fairly obvious, it is a truth nonetheless that the sheer size and diversity of Latin America as a region makes it a difficult part of the world to assess as a whole. Andrea Cattaneo, head of Brazil for BNP Paribas Securities Services, suggests that this is even more evident when it comes to analysing financial services trends.

He says: “Latin America is still very fragmented in terms of regulation and market practices. There are some markets which are more open to fund distribution, such as Chile and Colombia, and others that have been more closed in the past.”

According to Cattaneo, macroeconomic challenges including political instability in Latin America and around the world, mean international groups are taking decisions to refocus their strategies into more developed countries. BNP Paribas, for one, he says, is focusing its commercial activity on Brazil. He adds that there is a “globalisation process happening in Brazil, which is creating deeper links with Europe”, and that “the new regulatory framework for funds is creating interesting opportunities for players like us that can offer high quality solutions for local asset managers and funds”.

Similarly, BNY Mellon centres its Latin American business in Brazil, the only Latin American country in which it possesses a banking licence.

Carlos Salamonde, managing director and CEO for asset servicing in Brazil and Latin America at BNY Mellon, explains that, while the bank offers local-to-local business services in Brazil—fund administration, custody, and net asset value calculation—elsewhere, it offers custody services for funds domiciled in the likes of Chile, Colombia, Mexico and the Caribbean that are looking to invest into Brazil, or offshore.

However, the regulatory landscape in Brazil is in flux, with two major changes in legislation coming into effect in early July 2016. Instruction 555, imposed by the Brazilian Securities and Exchange Commission (CVM) not only reduced the number of possible classifications for fund types, leaving just fixed income, equities, multi-strategy and currency exchange funds, but it also increased the limits for offshore investment, and investment into certain types of assets.

Instruction CVM 558 is intended to regulate administration of security portfolios, while stimulating competition in the market. Under CVM 558, administrators and managers must publish periodic information to investors and regulators, thereby improving transparency of the market. However, CVM has also distinguished between portfolio managers, separating the responsibilities of ‘fiduciary managers’—those responsible for custody, control of asset and liabilities, and general supervision—and ‘asset managers’—responsible for making the actual investment decisions.

He says: “The regulation separates the roles, makes it clearer so that everybody understands, with no blurred areas, the different responsibilities of, for example, the NAV calculation provider and the custodian.”

CMV 558 reflects a change in the regulator’s attitude toward fund distribution—it also allows asset managers to distribute their own funds, a function that was always previously done by third-party providers, and a change that Salamonde says “asset managers have been requesting for some time”.

Equally, this change has added to the existing trend of globalisation, making the market more open to international flows. Cattaneo suggests that the challenging environment globally, and a shift towards more asset classes being denominated in US dollars and Euro, has created a need for asset managers to re-balance their portfolio allocations.

“This trend is creating opportunities for large, global asset managers that are implementing new strategies across the region, especially in terms of fund distribution,” he says.

According to Cattaneo, Latin American asset managers are approaching this issue in different ways. He says: “In some markets they are establishing a local presence, with commercial and operational offices, selling locally-domiciled funds, while in other markets, they sell funds domiciled elsewhere. These international funds are attractive to investors looking to allocate money outside Latin America.”

In Brazil, however, he says the reforms are “able to support international investment and regulatory changes, allowing domestic funds increasing exposure in international assets”.

From BNY Mellon’s point of view, this has led to an increased demand for a ‘one-stop-shop’ of service providers, as Brazilian fund managers look to concentrate their services into one multi-faceted firm—a service Salamonde is happy to provide.

He says: “This is great for us, because we already do this both globally and locally in Brazil. It’s a big trend that has been very profitable for our business.”

He adds that business has been steadily on the up for fund administration and custody in Brazil, a trend he says is good both for BNY Mellon and the Brazilian market.

However, outside of Brazil, where there is less of drive from the local regulators, Salamonde says this trend towards consolidation is still present, even though it is already generally clearer which providers are responsible for which services. Here, although there is not so much regulatory activity, clients are still demanding the extended services for their global investments.

Salamonde says: “If we can provide an additional service that can help our clients consolidate services and improve efficiency, we see that as a strength.”

Indeed, looking outside of the region altogether, the international regulatory environment is creating the need for easier globalisation of Latin American funds. Legislation such as the US Foreign Account Tax Compliance Act (FATCA) and the EU’s Solvency II Directive and Alternative Investment Fund Managers Directive (AIFMD) have had an impact around the world, and Latin American markets are no exception.

Cattaneo suggests that, although regulation in Latin America is very fragmented and locally-driven, it still tends to provide high standards of investor protection, and that the harmonised EU regulatory framework is “highly regarded and emulated across the region”.

He notes that there has been an increase in cooperation between European regulators and Latin American asset management associations, intended to increase both inbound and outbound fund flows between Europe and Latin America. However, Solvency II, AIFMD and FATCA have still affected the region heavily, as has the US Volker Rule, which prevents US banks from engaging in particular investment activities through their own accounts, due to the strong ties between the two regions.

Cattaneo says: “Those regulations are affecting managers on a day-to-day basis, especially those with internationalisation plans and global distribution ambitions.”

“There is a strong need for education and assistance from global providers like us, which are able to give a proper support in understanding these very complicated and dynamic regulatory frameworks.”

More specifically, Salamonde highlights FATCA as a particular challenge in Brazil, but one that the market has tackled and come out of the other side of.

Banks had to “raise the bar”, Salamonde says, in order to collect and report more information on their clients, which meant they had to review the structure of their file records. However, this ultimately helped with compliance with AIFMD and Solvency II, as well.

While the change was a challenge, he says, banks generally coped with it well, and the change was a positive one.

“Whenever any regulator launches new legislation, obviously it is going to have a big impact. But, this has been incorporated into our business and our clients’ business, and we see it as a positive move. We like to have as much clarity and as much information on our clients as possible, so it’s a positive thing for everyone.”

While Salamonde maintains that Brazil has a “very well regulated market”, he warns that the regulatory environment is still not quite where it needs to be.

He specifies: “We need to continue the discussion, especially for structured products in Brazil. Although new Instructions CVM 555 and CVM 558 brought great improvements, there is still room for development.”

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