BRIEF May 14, 2018

Public Notice: Manager of the Exchange Traded Fund (ETF)

The National Treasury Secretariat has released a Public Notice to select a manager for an Issuer-Driven Exchange Traded Fund – ID ETF.

The Public Notice published today outlines the rules that will govern the selection process of the Manager of the Exchange Traded Fund (ETF), structured new product developed together by the World Bank and the National Treasury Secretariat (STN, Secretaria do Tesouro Nacional), as regulated by Article 3-A of Law 10.179 of 2001.

The ID ETF Program

This selection process is part of the Issuer-Driven Exchange Traded Fund (ID ETF) program, an initiative by the International Bank for Reconstruction and Development (IBRD, the World Bank) to support the development of capital markets in emerging economies.

The ID ETF program aims to support countries in developing their domestic capital market. In doing so, governments can also boost public sector objectives and help overcome significant bottlenecks to capital market growth in emerging economies, including: setting reference prices; increasing market liquidity and transparency; and increasing the investor base.

Conceived as a global initiative, the ID ETF is being piloted in Brazil. The initiative stems from a collaboration between STN and the World Bank and is expected to soon be introduced in other emerging economies as well. In Brazil, the ID ETF consists of a fixed income exchange-traded  referenced by an index composed exclusively by public debt securities. This ETF modality is unprecedented in the Brazilian market, as it constitutes the first public initiative to launch a fixed income exchange traded fund in the country.

National Treasury Support

By supporting the creation of an ETF referenced by a public debt securities index in Brazil, STN is taking yet another step towards its strategic objectives including improving public debt management and developing Brazil's capital markets. These objectives include the de-indexation of the economy to one-day floating interest rates; consolidation of alternative price references in public debt securities markets; lengthening the average maturity of government debt, by encouraging longer-term benchmarks; increasing asset liquidity in the domestic financial market; diversifying the investor base and introducing a democratic savings mechanism for Brazilian investors.

It should be noted that the ETF - a fund with shares traded on the Stock Exchange – offers a direct boost to trading in the secondary market, and to the liquidity of public and private bonds in the Brazilian market. Likewise, by encouraging the daily disclosure of index prices, the ETF promotes transparency in the pricing of market assets.

World Bank Support

Through its ID ETF program, the World Bank works on several fronts to develop ID ETFs in emerging markets, including: communicating with market participants and governments; carrying out feasibility assessments and gauging the expected impact of the product on capital markets development and other indicators; promoting the product's credibility by setting minimum standards (e.g., issuer support in the primary and secondary markets, adherence to the development objective, and the process and criteria for selecting the fund manager); and offering technical assistance to address constraints and help countries meet the minimum standards required for the product. The World Bank also works globally to communicate the benefits of the ID ETF, and works with other emerging market countries to support the replication of the initiative.

The Selection Process

The Public Notice published today provides guidelines on the Fund Manager selection process. The Public Notice also describes the features of the ID ETF that the STN will be supporting and the eligibility requirements of the Fund Manager to be selected. The selection will focus primarily on the technical capacity of candidates, in addition to the management fee charged by the fund. The planned ID ETF must be referenced to the Anbima index of public debt securities indexed to the IPCA (IMA-B) and released through a widescale public offering, pursuant to CVM Normative Instruction no. 400 of 2003.

Details about the convening instrument and the ID ETF project in Brazil can be found on STN's website ( and on the World Bank's ID ETF program website (

Questions and answers:

1.       When will the ID ETF be introduced?

The ID ETF will be introduced by the fund manager, which will be selected at the end of the process referred to in the Public Notice issued by the STN. Following the selection process, the winning institution will be formally announced as the ID ETF manager and will have 18 (eighteen) months to launch the ID ETF in the market, by means of a public offering.

2.       Will the ID ETF be guaranteed by the STN and / or the World Bank?

No. The ID ETF will not be guaranteed by any of the institutions supporting the launch of the fund in Brazil. The support provided by the National Treasury Secretariat (STN) and the World Bank to the ID ETF does not imply any guarantee of profitability or protection of the principal capital invested in the fund, or of the accuracy of the information provided. The STN and the World Bank shall have no direct or indirect liability or responsibility to any person or entity for any losses, damages, costs, charges, expenses or other obligations arising from any investment in the ID ETF.

3.       What is the difference between the Tesouro Direto Program and the I-D ETF?

These are completely different and independent programs. Tesouro Direto ("Direct Treasury") is a program under the National Treasury Secretariat developed in partnership with the Stock Exchange (B3) to enable the direct sale of federal government securities to individuals. Created in 2002, Tesouro Direto was designed to make access to government securities more democratic, and to include individuals with lower amounts to invest. Prior to this program, individuals could only invest in government securities indirectly, through fixed income funds that charged high management fees (especially for low-value investments), which ultimately rendered this investment modality less attractive.

The ID ETF, in turn, is a pioneering global program implemented in Brazil by the World Bank in collaboration with the STN.  Differently from Tesouro Direto, the ID ETF fund will not be created by the STN, but by the Fund Manager that is selected following the selection process. The Fund Manager will be responsible for structuring the product in accordance with the minimum parameters and requirements set forth in the Public Notice, and for making the product available to Brazilian society by means of a widescale public offering. As a benefit for creating and managing the ID ETF in the Brazilian market, the manager will receive support from STN in the form of the direct issue of a basket of federal public debt securities in equal proportion to the IMA-B index portfolio used as reference by the fund. This support is meant to reduce the operational costs of launching the fund incurred by the manager; it is not a guarantee by the STN regarding profitability or invested capital.

Through this initiative, the STN intends to encourage the development of a fixed income ETF market in Brazil.

4.       Who can participate in the Selection Process?

All financial institutions registered with the CVM as managers of securities portfolios in the resource manager category are eligible for the selection process. When the proposal is submitted, the candidate must specify the institution that will be managing the fund, in case the candidate itself will not be doing so. In that case, the institution specified by the candidate must be registered with the CVM as a securities portfolio manager in the fiduciary manager category.

5.       What are the primary technical criteria required in the Selection Process?

The selection process for ID ETF manager is based on technical capacity and price; institutions will be selected based on the analysis of two proposals: a technical proposal and a commercial proposal, with weights of 70% and 30%, respectively.

At the technical stage, the technical training of the participants and the business plan presented in the technical proposal will be evaluated.  The final score for this stage will be composed of two scores - the Technical Training Score (NCT, Nota de Capacitação Técnica) and the Business Plan Score (NPL, Nota do Plano de Negócio). Details on the evaluation criteria can be found in the Public Notice.

At the commercial stage, the candidates' scores will be calculated based on the ID ETF management fee specified in the commercial proposal.

6.       About the ID ETF reference index

a.       What is the reference index for the ID ETF?

The reference index for the ID ETF will be the IMA-B, or the Anbima Market Index of National Treasury Notes - Series B (NTN-B). This is a fixed income sub-index in the IMA family (Anbima Market Index) released by the Brazilian Association of Financial and Capital Market Entities (Anbima), which represents the evolution, at market prices, of the theoretical portfolio of federal public securities indexed to the Broad National Consumer Price Index (IPCA, Índice Nacional de Preços ao Consumidor);

b.      How is the theoretical portfolio assembled for this index?

The IMA-B index represents the evolution, at market prices, of the theoretical portfolio of federal public securities indexed to the Broad National Consumer Price Index (IPCA). These securities are called National Treasury Notes - Series B (NTN-B). Currently, the average term for this index is approximately 9 years.

c.       Why did the Treasury set this index as a reference for the fund?

When defining the reference index for the ID ETF, the STN prioritized two key aspects. First, the adherence of the index to the qualitative guidelines that guide the federal public debt financing strategies disclosed annually in the Annual Financing Plan (PAF, Plano Anual de Financiamento), which include: (i) gradual replacement of floating-rate securities with fixed-rate securities and price-indexed securities; (ii) increase in the average time to maturity of the outstanding federal public debt; (iii) increase in the liquidity of federal public securities in the secondary market; and (iv) expansion of the investor base.

Second, the attractiveness of the index to the industry and investors, so that the Brazilian ID ETF program can fulfill its objective of contributing to the development of the financial market - especially the secondary public securities market.

7.       Who will pay the fund's management fee?

As in the vast majority of investment funds traded in the Brazilian market, the ID ETF’s management fee will be paid by the fund's shareholders. It should be noted that the STN's support - by directly issuing the basket of public securities to the fund - is meant to reduce the ID ETF structuring costs incurred by the manager and, therefore, enable lower management fees when the ID ETF is made available to the public.

8.       Who can invest in the ID ETF?

All legal entities and individuals authorized by Brazilian regulations to participate in primary public offerings and / or trade in secondary market securities (both on the Stock Exchange (B3)) may invest in the ID ETF. Individual and institutional investors, resident and non-resident - i.e., individuals, pension funds, investment funds, insurance companies, banks, capitalization entities, and others - may invest in the ID ETF.

9.       How can one invest in the ID ETF?

Parties may invest in the ID ETF by acquiring shares. ETF shares can be acquired by investors in two ways. First, when the fund is first formed by the manager, by investing in the ID ETF public offering in the primary market. Second, by purchasing ID ETF shares traded on the Stock Exchange (B3), in the secondary market.

10.   About the ID ETF primary public offering:

a.       What is the public offering model for ID ETF shares?

The ID ETF will be launched by means of a public offering of its shares in the Brazilian market to a diversified investor base, in accordance with CVM Instruction no. 400, dated December 29, 2003.

b.      Who can participate in the public offering of ID ETF shares?

The public offering of ID ETF shares is meant to reach a broad and diversified investor base; participation is open to any individuals or corporations wishing to invest.

c.       Is there a minimum threshold to the public offering ID ETF shares?

The total ID ETF amount offered initially will be no less then R$ 300,000,000.00 (three hundred million reais), to be raised by means of a public offering of shares. The primary concern when setting the minimum initial size for the ID ETF was to ensure that the fund was economically viable. In emerging economies, ETF public securities markets have been constrained by the illiquidity of the instruments traded in local financial markets, which raises the cost of creating these funds and aggravates the risks faced by fund managers. In these environments, the viability of an ETF requires a minimum amount of capital under management to ensure that the revenue from the management fee is sufficient to cover the structuring and administration costs incurred by the manager. According to the World Bank, market consultations indicate that a viable ETF would need to reach a minimum size of approximately US$ 50 million to US$ 100 million, depending on the project. In the case of the ID ETF, each fund is expected to reach at least US$ 200 million of assets under management after 2 years of operation.

d.      Will the Treasury support new public offerings of ID ETF shares?

The STN may, at its discretion, make additional issues from the basket of securities to the ID ETF within 24 (twenty four) months of its Launch, counted from the date when the securities were first issued, provided that:  (i) for each subsequent issue, the Manager notifies the STN in writing of its intention to create ID ETF shares, in the amount of no less than R$ 300,000,000.00 (three hundred million reais); and (ii) the cumulative value of all subsequent issues does not exceed R$ 2,000,000,000.00 (two billion reais).

11.   About the ID ETF secondary market:

a.       Who can acquire ID ETF shares in the secondary market?

As in the stock market, any investor - whether individuals or legal entities -  may buy and sell shares on the secondary market in the Stock Exchange (B3).

b.      Will the STN provide any support to the ID ETF secondary market?

No. The STN will not be providing any support or engaging in any action directly and exclusively related to the secondary market of ID ETF shares.

12.   What is the tax model applicable to the ETF?

The fixed income ETF tax model was established by Law 13,043, dated November 13, 2014. It follows an asset time to refixing rationale, in which taxation is based on the duration of assets when they are traded. This model brings two innovations to the taxation scheme in Brazil's fixed income market: (i) a tax rate not based on the amount of time the investor holds the investment. In the ETF, the rate is based on the time to refixing for the invested asset, with decreasing rates for investments in assets that have longer duration; (ii) the absence of “come-cotas” (a capital gains tax) charged every six months on investments in mutual funds.

This model favors the trading of shares in the secondary market of the Stock Exchange.

13.   Will the Treasury support new ID ETFs with the same reference index?

The STN will not support the launch of any other ID ETFs with the same Reference Index in the 36 (thirty-six) months after the STN-supported ID ETF release.  In other words, the STN guarantees 36 months of exclusive support to the ID ETF manager.

14.   Will the Treasury support new ID ETFs with the other reference indices?

Under the collaboration with the World Bank, the STN retains the prerogative to decide whether to support the release of new ID ETFs. It should be noted that STN's participation in the ID ETF project is meant to encourage the development of the Fixed Income ETF industry backed by public securities, in accordance with CVM guidelines. The STN hopes that the Brazilian market will continue to develop on its own after this initial incentive, with other financial institutions releasing their own ETFs.