Investor starts to follow daily oscillation of private fixed income securities in 2023

As of January 2, 2023, investors with private fixed income securities will begin to notice a difference in bank and brokerage statements containing the performance of their financial investments.

From that date forward, securities issued by large companies to raise funds from financial agents, such as debentures and Real Estate Receivables Certificates (CRI) and Agribusiness Receivables Certificates (CRA), will have to follow a rule known in the jargon as mark-to-market.

In mark-to-market, fixed-income securities begin to reflect daily price fluctuations in day-to-day negotiations between investors, which may occur due to issues involving the average perception of market agents in relation to the company issuing the security, known as such as credit risk, or aspects more linked to the macroeconomic scenario in general, known as market risk.

In recent days, with the debate on the conduct of fiscal policy by the Lula government from 2023 leaving investors fearful, for example, the rates of securities traded on the market have risen sharply, which has caused the prices of securities to fall , considering the face value that the investor paid for the asset — this happens because, once the security is profitable at a higher interest rate than at the time of acquisition, the price of the security automatically decreases.

Among public securities traded on the Treasury Direct, a platform dedicated to the trading of public securities by individual investors that has already followed the mark-to-market rule since 2002, the price of the fixed-rate security maturing in 2029 accumulated a devaluation of 5.5% in the 30 days ended December 7, while inflation-indexed paper for 2055 yielded 5.06%.

The measure, established by Anbima (Brazilian Association of Financial and Capital Market Entities), a market association that acts as a self-regulator in the sector, tends to increase transparency in the market, since the investor will have more accurate control over how it is determined investment in a fixed income security, depending on conditions at the time.

The measure requires securities distributors to disclose the mark-to-market at least monthly.

“Investors will see equity fluctuating and will want to understand why it fluctuated, they will look for information, so the measure is positive for the development of the market, with the client more informed and safer to make a decision”, says Thiago Manso, executive responsible for XP’s fixed income sales and negotiations.

Until then, these securities followed a rule known in the market as marking the curve, in which the daily volatility of the securities was not reflected in investor statements, with only the indication of the projected value to be received by the investor on the maturity of the security.

900 thousand investors and BRL 200 billion impacted by the measure from 2023

The most recent data from B3 indicate that, at the end of September, there were around 900 thousand investors with debentures, CRIs and CRAs in their portfolio, in a combined volume of approximately R$ 200 billion.

According to Manso, the mark-to-market measure tends to bring an additional layer of protection to investors.

“If the investor does not see the volatility to which the securities are subject, it may happen that he thinks that the position is the same as when he bought it, and only discovers when he is going to sell that the security has gone up or down a lot in price, could be taken by surprise”, he says.

The mark-to-market rule will also come into effect from next year on public securities bought and sold on the secondary market, when the securities change hands among the investors themselves.

Securities issued by financial institutions, such as CDBs, LFs (Financial Bills) and LCIs (Real Estate Credit Bills) and LCAS (Agribusiness Letters of Credit), which are traded less than corporate bonds, continue to follow curve marking rule.

The objective is to increase transparency and standardize the market, defends Anbima

Superintendent of investment products at Itaú Unibanco, Rogério Calabria says that since mid-2018, the bank has already adopted the practice of marking-to-market for corporate fixed-income securities in investor portfolios.

The new measure established by Anbima, therefore, will not have an impact on the bank’s customers, who are already used to market dynamics, says Calabria.

Among the large banks, only Itaú already uses mark-to-market for fixed-income corporate bonds —Bradesco, Santander, Banco do Brasil, BTG Pactual and Caixa will implement the measure as of January.

“We believe this is the most correct way of informing investors, so that the customer knows how much the security is worth each day, in case he wants to sell at a certain point before maturity”, says the bank’s executive.

Vice-president of Anbima’s distribution forum and executive responsible for Santander’s distribution area, Luciane Effting says that the measure is important to improve the information provided by banks and brokerages to the customer.

“The goal is to bring more and more transparency and standardize the way the market operates, so that the customer has the same information on any platform”, says the executive.

Calabria, from Itaú, adds that, with the increase in the interest rate market in recent weeks, the trend is that many investors who still do not have the bonds marked to market will see a negative return on the papers from January 2023.

According to the superintendent of investment products at Itaú, on average, securities should register a negative return of between 4% and 5% due to the increase in interest rates in the market.

He points out, however, that this is a very difficult forecast to make, since profitability will depend on a series of factors, such as the company issuing the security, the credit risk of the paper and the maturity period.

“The measure is positive, since it goes along the lines of encouraging transparency and financial education for investors. Although the process may cause some pain for those who will start to see the daily profitability of the bonds, it is necessary”, says Calabria.

Órama shows concern about the impact of the measure on fixed income

Órama’s executive director, Thiago Villela, says that he sees the beginning of indiscriminate mark-to-market for investors of all risk profiles with some concern.

According to Villela, the volatility that will be observed on a daily basis in fixed income securities may create a disincentive for customers who are used to carrying securities to maturity, who are not used to it and, in some cases, did not even know about the existence of the practice of marking to market.

“We are concerned about how investors will perceive this change, and whether this transparency will help to encourage fixed income by providing greater peace of mind for trading on the secondary market, or whether it will be harmed by insecurity as to the value of these assets”, says the director of Orama. “I’ve been joking that fixed income has now become variable income.”

He claims that the scope of the obligation, imposing disclosure on all investors, may have been overstated.

Making available a source of consultation regarding the daily update of bond prices, which would probably be accessed mainly by those interested in selling bonds in advance, would already be enough to bring more transparency to the market, but without impacting those who prefer to take the bonds to the salary, says the executive.

Villela also states that the recommendation that has been given to investment advisers in conversations with clients is that, respecting the risk profile of each one, a reduction in the maturity dates of the securities in the portfolios is sought, since, the longer the duration of the security, the greater the volatility tends to be due to movements in the interest rate market.

“The macro and political scenario did not favor transparency”, he says, referring to the recent opening of interest rates in the wake of increased market risk aversion on the conduct of economic policy in 2023.

“It is super important that all distributors are preparing their specialists, because, without a doubt, investors will be questioned from January onwards, when they observe this mark-to-market in securities”, says Luciane, from Anbima.

She defends that the measure is beneficial to the investor, by making the public aware of the fact that, despite being a fixed income security, it can, indeed, fluctuate, according to market conditions and the company itself.

What is mark-to-market?

Mark-to-market represents the daily price fluctuation of fixed income securities traded by financial agents, which can be influenced by aspects related to issues specific to the issuing company, known as credit risk, or because of the macroeconomic scenario in a way general, known as market risk.

What changes for the investor?

Until then, fixed-income securities issued by companies followed a rule known in the market as curve marking, in which the daily volatility of the securities was not reflected in investor statements, with an indication only of the projected amount to be received at the maturity of the paper. With the start of marking to market, the daily movement of purchases and sales, and the impacts on asset prices, will be informed to investors.

Which titles will have to follow the rule?

Fixed income securities issued by companies, such as debentures, Real Estate Receivables Certificates (CRI) and Agribusiness Receivables Certificates (CRA). Bank-issued securities, such as CDBs and Financial Bills, will not have to follow the requirement. Public securities traded on the Direct Treasury have been marked to market since 2002.

How many investors are expected to be affected?

The most recent data from B3 indicate that, at the end of September, there were around 900 thousand investors with debentures, CRIs and CRAs in their portfolio, in a combined volume of approximately R$ 200 billion.

When does the new rule take effect?

As of January 2, 2023

Who needs to comply with the rule?

All banks and brokerages in the market. Among the large banks, Itaú has already adopted the mark-to-market rule since mid-2018. Bradesco, Santander, Banco do Brasil, BTG Pactual and Caixa will implement the rule as of January 2023.