Fixed income, considered “dead” by some when the Selic rate reached 2% a year, is more alive than ever. With the economy’s basic interest rates back to 13.75% less than two years after reaching the historic low, investments in this category are boiling – and more news will come around the turn of 2023.
This time, the issue is regulatory, but it will represent an important change in the daily lives of investors. Investment distributors, such as banks and brokerages, will need to “mark to market” the value of some fixed income securities, such as Agribusiness and Real Estate Receivables (CRAs) and Real Estate (CRIs), debentures and government bonds acquired via treasury.
Mark-to-market will allow individual investors to monitor, day by day, how much the equity they have acquired is worth. This is because this process is nothing more than updating the value of these securities according to the prices at which they are being traded on the market.
The rule was established by Anbima (Brazilian Association of Financial and Capital Market Entities) earlier this year. Banks and brokers have until the end of the year to adapt their processes and inform their customers about the new system, which will take effect on January 2, 2023.
“The objective is to have standardization for investors to monitor their investments, so that they can make a more transparent comparison, if they have accounts in more than one place”, explains Luciane Effting, vice president of Anbima’s Distribution Forum.
But in practice, what will change for investors? O InfoMoney listened to Anbima, banks and brokers and explains the details below. Check out:
1) What exactly will happen to fixed income investments from January 2023?
Papers such as debentures (incentivized or not), CRIs, CRAs and government bonds acquired via the treasury (and not by the Direct Treasury) will be marked-to-market by banks and brokerage firms in the portfolios of individual investors. In other words, investment statements will present the updated values of these assets, according to the prices at which they are being traded in the market.
With this process, the investor will better understand how much the security he bought in the past is worth today, according to Luciane, from Anbima. For this, investment statements must contain the date of the last update of the price of each of the investor’s assets.
It is important to remember that, although the prices of the assets will be updated, if the investor keeps the securities in the portfolio until maturity, he will receive as a return the rate of remuneration that was contracted when he acquired them. The new measure only seeks to offer a possibility to monitor prices and verify if there is a possibility of gain with the early exit of paper.
2) How does it currently work?
Currently, most banks and brokers update the prices of fixed income investments based on the so-called “marking on the curve”.
Lucas Queiroz, fixed income strategist for individuals at Itaú BBA, explains that the difference lies in the rate used in the calculation. A security marked on the curve has its value updated every day at the same rate contracted by the investor at the time of purchase of the security.
If the investor has acquired a CRA that offers a return of 13% per year, for example, every day the broker will apply this rate on the amount invested to inform how much the paper is worth at the moment. This type of markup usually makes sense for investors who want to redeem the amount invested only at maturity.
Now, with mark-to-market, the movement will be different: the update of the value will be carried out from the rate that is being negotiated in the market for that investment on the day. This rate should normally change every day.
3) Will the mark-to-market also apply to bank papers, such as CDBs?
The change does not include Bank Deposit Certificates (CDBs), Agribusiness Letters of Credit (LCAs) and Real Estate (LCIs), which will continue with the marking on the curve that is made today.
According to Luciane, from Anbima, the explanation lies in the fact that these bonds are issued by financial institutions that guarantee the repurchase of the papers based on the marking on the curve.
In the case of CRIs, CRAs and debentures, the issuing company does not repurchase the paper when the investor wants to. He needs to find another investor willing to pay for the paper on the secondary market if he wants to get rid of it.
4) Are there already marked-to-market fixed income investments by banks and brokers today?
Government bonds acquired through Treasury Direct are marked-to-market. As a result, between the date of application and redemption, the price of the security varies daily according to market conditions and interest rates.
Thus, when the market starts to price a rise in the yield curve, for example, the tendency is for public bond rates to rise. As a result, the value of the shares declines. The opposite is also true: if the projections for the Selic fall, the rates offered on public bonds fall – and prices advance.
In July of this year, for example, when rates rose a lot and the real interest offered by some government bonds exceeded 6% per year, the prices of some Treasury Direct papers fell by 9%.
In addition to Treasury Direct bonds, funds that invest in credit assets also mark to market, in their portfolios, securities such as CRIs, CRAs and debentures.
For Myrian Lund, financial planner CFP, the new rule should equalize the purchase of individual assets through brokerages with practices already adopted in the fixed income fund industry.
5) For which investors will mark-to-market apply?
According to Anbima’s new rule, investments made by individuals will need to be marked solely on the market, and no longer on the curve.
Qualified investors – who have more than R$ 1 million in financial investments – will be able to choose whether they prefer mark-to-market or on the curve. If they choose to mark the curve, they will have to formalize this request with the broker.
6) How will the updated value of fixed income investments be calculated?
Most of the brokers consulted by the InfoMoney said that he will use the data gathered by Anbima as a reference.
Anbima collects prices every day, early in the morning, when member institutions send the quotations at which the papers are being traded on the market, in the same way as with government bonds.
After receiving this data, Anbima analyzes the values and checks if there are very discrepant numbers between the different banks and brokers. Then, it establishes a reference price, available in Anbima Data, a system that can be accessed by everyone.
According to brokers, rates for CRIs, CRAs and debentures are based on data published by the association on the previous business day (D-1, in financial jargon).
7) What does Anbima take into account when establishing the value of the shares?
According to Luciane, the association analyzes the same information as the market in general. That is, it checks whether the security has liquidity and evaluates the latest trading prices to understand how much financial agents are willing to pay for the security. Issuer characteristics, such as credit risk, are also verified.
8) How often will fixed income securities be marked to market by banks and brokerages?
Anbima’s norm determines that the houses must mark the papers to market at least once a month.
According to Luciane, the reason is that investors who buy securities of this type do not usually trade them every day. “The update period, of 30 days at most, is enough for the investor to have an idea of how much it is worth”, he explains.
However, most of the brokers consulted by the InfoMoney informed that the calculation of prices will be done daily.
9) Anbima’s rule says that banks and brokerage firms may or may not use the prices determined by the association as a basis for marking to market. It’s not an obligation. Could there be a discrepancy between the prices of the same security on different brokers?
For Luciane, the possibility offered by Anbima – that the houses use their own methodology to establish the mark-to-market value – should not generate a discrepancy, because the “master rules” were given. Currently, Anbima is able to price around 90% of the assets available on the market. “We believe that there will be a convergence”, she says.
Anbima, however, does not deny that there may be a certain price difference in less liquid papers, which are not priced by the association and which are calculated directly by distributors. These securities, however, are not usually traded by individuals.
10) Some brokers already offer both mark-to-market and mark-to-curve for investors. What changes in this case?
Queiroz, from Itaú BBA, highlights that the difference as of January 2023 is that all distributors will offer mark-to-market, which should encourage investors to rotate the portfolio before the maturity of fixed income investments – which could help the market to have more negotiations and a more accurate price formation.
“We have many securities that we have already marked to market, but as there is no negotiation on the secondary market, there are no new prices to mark. The rate ends up being fixed,” he says.
11) Does this mean that mark-to-market can help boost trading in securities like CRIs and CRAs?
For Luciane, from Anbima, the secondary market can benefit from the possibility of an early exit. “The updated mark-to-market gives the investor the opportunity to see if he can have a gain to reinvest, or if it is more advantageous to carry the paper until maturity”, he explains.
Currently, argues Queiroz, from Itaú BBA, those who need to sell a CRI or a CRA in advance cannot find a strong secondary market to guide rates. There is no liquidity and, because of the lack of reference prices, the investor may be forced to dispose of the investment at unfavorable prices.
It’s easy to understand the process by making an analogy with the new and used car market, says Queiroz. If a particular car model doesn’t have a robust used market, people who bought a new car and want to sell it won’t be able to do so easily – they may have to offer a discount. The situation is different for those who buy a new vehicle knowing that there are people interested in that used model.
For Queiroz, the benefit of mark-to-market, in short, is the possibility of creating a positive cycle for the fixed income market. He explains that, by generating more business in the secondary market, this can attract new investors. With more money in circulation, the trend is for more companies to seek to raise funds in the primary market.
12) Investors may find it strange that their fixed income investments start to appear on the statement with negative returns from time to time, due to mark-to-market. What should Anbima and brokers do about this?
Luciane, from Anbima, informs that market participants were notified in advance of the change and that they are on the front line to provide clarification to investors. However, the expert does not deny that investors may be scared at first. At the same time, she remembers that the rule is not completely new.
“Today, there is already a daily update of quotas in investment funds. The investor is already used to it”, highlights the representative.
Anbima also informed that it is preparing educational materials to alert investors. At Ativa Investimentos, for example, some educational notices should be made towards the end of the year to prepare investors, as explained by Rodrigo Regis, head of financial solutions at the house.
13) Will prices be marked to market retroactively, in the history of investments?
According to Anbima, the rule can be applied from the effective date of the rule, which is January 2, 2023, for all assets in the client portfolio that are within the scope of the rules.