Brazil’s central bank yesterday (Monday) launched a public consultation on proposed secondary legislation that would be incorporated into the country’s covered bond law and define the finer details of the Brazilian product.

Legislation for Brazilian covered bonds, named letras imobiliárias garantidas (LIGs), came into force in January 2015, and more detailed secondary legislation has since then been awaited to establish exactly how the Brazilian product will work. The task of defining these features was delegated to the Monetary National Council, which includes the central bank.

The draft regulation has been made available on the central bank’s website, and the deadline for feedback is 30 April. The secondary legislation is expected to be approved and implemented this year, according to market participants.

Standard & Poor’s said in a preliminary assessment last month that, having analysed the Brazilian framework, it had concluded that the law as it stands would allow a Brazilian covered bond programme to be rated above the issuer’s respective Issuer Credit Rating (ICR) under its criteria. Specifically, the rating agency highlighted that the legal framework segregates the cover pool assets in the event of insolvency proceedings against the covered bond issuer.

The S&P analysts cited a number of “loose ends” in the law – relating to eligibility criteria for cover assets and the mitigation of the risk of claw-back of voluntary overcollateralisation, acceleration of payments, and liquidity risk – but expect these to be addressed in the secondary legislation.

Photo: Banco Central do Brasil; Source: Senado Federal/Flickr