The Fixed Income Sign of the Market is Coming: 13 Questions to Understand What Will Change in Your Investments

The Fixed Income Sign of the Market is Coming: 13 Questions to Understand What Will Change in Your Investments

Fixed income, which some consider “dead” when Selic’s rate hit 2% per year, is more vibrant than ever. With the economy’s base interest rates back at 13.75% two years after hitting their historic low, investments in this category are boiling — and more news will come in early 2023.

This time, the issue is regulatory, but it will mark an important change in the everyday lives of investors. Investment distributors, such as banks and brokerages, will need to “mark for marketing” the value of certain fixed income securities, such as agribusiness, real estate debtors (CRAs), real estate (CRIs), and government-acquired bonds and bonds.

Mark-to-market application will allow individual investors to monitor the value of the shares they have acquired day in and day out. This is because this process is nothing more than updating the value of these securities according to the prices at which they are traded in the market.

The rule was set up by Anbima (Brazilian Association of Financial Entities and Capital Markets) earlier this year. Banks and brokers have until the end of the year to adapt their operations and inform their customers of the new system, which will come into effect on January 2, 2023.

“The goal is to set standards for investors to monitor their investments, so they can make a more transparent comparison, if they have accounts in more than one place,” explains Lucien Effing, Vice President of Anpima Distribution Forum.

But in practice, what will change for investors? a Infomoney Hear Anbima, banks and brokers explain the details below. paying off:

1) What exactly will happen to fixed income investments as of January 2023?

Papers such as bonds (catalyzed or not), CRIs, CRAs and government bonds acquired via treasury (and not by direct treasury) will be touted to the market by banks and brokerage firms in individual investor portfolios. In other words, the investment data will display the updated values ​​of these assets, according to the prices at which they are being traded in the market.

Through this process, the investor will better understand how much of the securities he bought in the past are worth today, according to Lucien, of Anpima. For this, the investment data should 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 holds the securities in the portfolio until their maturity date, he will receive as a return the contracted reward rate upon acquisition. The new procedure only seeks to provide the possibility of monitoring prices and checking whether there is potential for gains through early exit of paper.

2) How does it currently work?

Currently, most banks and brokers update their fixed income investment prices based on what is called “curve pointing.”

The difference lies in the rate used in the calculation, explains Lucas Queiroz, an individual fixed income strategist at Itaú BBA. The value of the security marked on the curve is updated every day at the same price contracted by the investor at the time the security was purchased.

If an investor has a CRA that offers a yield of 13% per year, for example, each day the broker will apply that rate to the amount invested to report the value of the paper at the moment. This type of markup usually makes sense for investors who want to only get back the invested amount at maturity.

Now, with the market ticking, the movement will be different: the value will be updated from the market-negotiated price of that investment on the day. This rate should usually change every day.

3) Will the mark to market also apply to bank notes, such as CDBs?

The change does not include Certificates of Deposit Banks (CDBs), Letters of Credit for Farm Business (LCAs) and Real Estate (LCIs), which will continue to mark the curve made today.

According to Lucien, of Anbema, the explanation lies in the fact that these bonds are issued by financial institutions that guarantee the repurchase of papers based on the notation on the curve.

In the case of CRIs, CRAs and bonds, the issuing company does not buy back the paper when the investor wants it. He needs to find another investor who is willing to pay for the paper in the secondary market if he wants to get rid of it.

4) Are there already defined fixed income investments in the market by banks and brokers today?

Government bonds acquired through Treasury Direct are market marked. 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 begins pricing a rise in the yield curve, for example, the trend is for general bond prices to rise. As a result, the value of the shares decreases. The reverse is also true: If expectations for Selek’s fall are falling, the prices offered on public bonds are falling — and prices are advancing.

In July of this year, for example, when prices rose a lot and the real interest offered by some government bonds exceeded 6% annually, the prices of some direct treasuries fell by 9%.

In addition to direct treasury bonds, money invested in fiduciary assets also registers in the market, in their portfolios, and securities such as CRIs and CRAs and bonds.

For Myrian Lund, a CFP financial planner, the new rule should equate the purchase of individual assets through brokerages with practices already in place in the fixed income fund industry.

5) Which investors will give a sign to the market?

According to Anbima’s new rule, investments made by individuals should only be determined in the market, and not anymore in the curve.

Qualified investors – who have more than 1 million R$ in financial investments – will be able to choose whether they prefer marking the market or the curve. If they choose to define the curve, they will have to formalize that order with the broker.

6) How will the updated value of fixed income investments be calculated?

Most brokers consulted before Infomoney He said he would use the data collected by Anbema as a reference.

Anbima collects prices every day, early in the morning, when member institutions send quotes for which papers are traded in the market, as with government bonds.

After receiving this data, Anbima analyzes the values ​​and checks in case there are very different numbers between different banks and brokers. It then sets a reference price that is available in Anbima Data, a system that is accessible to everyone.

According to the brokers, prices for CRIs, CRAs, and bonds are based on data published by the association on the previous business day (D-1, in financial terms).

7) What does Anbima consider when determining the value of shares?

According to Lucian, the association analyzes the same information as the market in general. That is, it checks whether a security has liquidity and evaluates the latest trading prices to understand how much financial agents are willing to pay for the security. The characteristics of the issuer, such as credit risk, are also checked.

8) How often will fixed income securities be marked in the market by banks and brokerages?

Anbima standards specify that homes must mark papers for marketing at least once a month.

According to Lucian, the reason is that investors who buy securities of this type do not usually trade them every day. “The update period, which is 30 days at the most, is sufficient for an investor to have an idea of ​​how much it is worth,” he explains.

However, most brokers have consulted before Infomoney Note that prices will be calculated on a daily basis.

9) The Anbima Rule states that banks and brokerages may or may not use the prices set by the association as a basis for marketing in the market. It is not an obligation. Could there be a discrepancy between the prices of the same security on different brokers?

For Luciane, the possibility presented by Anbima – that houses use their own methodology for determining the value of the mark to the market – should not generate a contradiction, because the “key rules” were provided. Currently, Anbima is able to price around 90% of the available assets in the market. “We think there will be a convergence,” he says.

However, Anbima 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. However, these securities are not usually traded by individuals.

10) Some brokers actually offer both market marketing and price skew to investors. What changes in this case?

Queiroz, of Itaú BBA, highlights that the difference as of January 2023 is that all distributors will introduce a mark-to-market, which should encourage investors to rotate the portfolio before fixed-income investments mature — which could help the market get in more negotiations and shape a more price. Accuracy.

“We have many securities that we have already set in the market, but since there are no negotiations in the secondary market, there are no new rates to be set. The rate ends up being fixed,” he says.

11) Does this mean that market marketing can help promote trading in securities such as CRIs and CRAs?

For Luciane, of Anbima, the secondary market can take advantage of the possibility of an early exit. “The updated market tick gives the investor the opportunity to see if they can make a reinvestment gain, or if it is better to hold the paper to maturity,” he explains.

Currently, Queiroz, of Itaú BBA, argues those who need to sell a CRI or CRA up front can’t find a strong secondary market to guide prices. There is no liquidity, and due to the lack of reference prices, the investor may have to dispose of the investment at unfavorable rates.

Queiroz says the process is easy to understand by drawing an analogy with the new and used car market. If a particular car model does not have a strong used market, people who have bought a new car and want to sell it will not be able to do so easily – they may have to offer a discount. The situation is different for those who buy a new car knowing that there are people who are interested in this used model.

For Kayrouz, the advantage of market marketing, in short, is the potential to create a positive cycle for the fixed income market. He explains that by generating more business in the secondary market, it can attract new investors. With more money in circulation, the trend is for more companies to seek to raise money in the primary market.

12) Investors may find it strange that their fixed income investments start showing up in the statement with negative returns from time to time, due to market marketing. What should Anbima and psychics do about it?

Lucien, from Anbema, reported that market participants have been notified in advance of the change and are on the front line to provide clarifications to investors. However, the expert does not deny that investors may be afraid at first. At the same time, remember that the rule is not entirely new.

Today, there is already a daily update of the shares in investment funds. The investor is already used to it, ”the actor highlights.

Enbima also reported that it is preparing educational materials to alert investors. At Ativa Investimentos, for example, some year-end education notices should be introduced to prepare investors, explained Rodrigo Regis, head of in-house financial solutions.

13) Will the prices be set retroactively on the date of the 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 a client’s portfolio that fall within the scope of the rules.

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