Emerging Markets Rates and Currencies Handbook

72 Citi | Emerging Markets Currencies Handbook 2021 Brazil Foreign investors must have Brazilian custodians, legal representatives and tax representatives. Investors established in tax haven jurisdictions are taxed as local investors. If established in a non-tax haven jurisdiction, investors are taxed as follows: • Swap and future (OTC): 10%. • Exchange-traded derivatives: Exempt. Rates: Markets Overview • The local BRL interest rate which indexes the government floating debt is the “SELIC” rate . • The interest rates settled in the transactions performed through the SELIC — mainly repurchases agreements (repos) — are influenced by the BCB’s management of the interbank liquidity via open market operations (OMO). • The SELIC transactions’ weighted average interest rate is called the ‘over SELIC’ interest rate, which stands as a representative of the cost of interbanking funding and, ultimately, the benchmark for the prevailing interest rates in the Brazilian economy. • Accordingly, the BCB’s OMO are executed for monetary policy purposes, in order to keep the ‘over SELIC’ close to the target (which is greatly driven by inflation controls) for the SELIC interest rate defined, every 45 days, by the BCB’s Monetary Policy Committee ( “Comitê de Política Monetária” — Copom ). • The market benchmark rate is the interbank overnight interest rate, the “CDI” (“ Certificado de Depósito Interbancário ”) which keeps a very close relation to the SELIC (currently there is no premium between them). CDI is published daily by B3, the central securities depository. The local BRL interest rates are calculated on exponential business days basis: Tenor (Business Days) BRL Rate (exp/252) Interest Rate Factor Tenor (Counting Days) BRL Rate (exp/360) Interest Rate Factor 122 2,11% 1,01016 181 2,03% 1,01016 247 2,85% 1,028 360 2,80% 1,028 • The fact that the BRL is not a free convertible currency and local transactions are indexed and not denominated in USD, there is a local USD interest rate curve (the “cupom curve”). • The local USD interest rate curve follows local and international drivers such as: - The movements of the international USD curves. - The government issuance of USD indexed bonds and derivatives. - Corporates’ demand for hedging. - Brazilian country risk perception. Non-Deliverables (Derivatives): NDFs, FX Options, Interest Rate Swaps, Interest Rate Options and XCCY Swaps • Transactions are executed under a local bilateral Master Agreement (local ISDA equivalent). • All transactions must be registered at B3 or any other clearing house duly approved by BCB/CVM. • On-shore derivatives must be considered as a hedging transaction to be tax deductible. • Losses in offshore OTC derivatives entered by Brazilian companies with offshore counterparties are not deductible (only derivatives traded directly through an offshore exchange are deductible). • NDF, forwards and options are subject to 0.005% withholding tax, deductible from the 15% income tax to be paid by the company directly. • Swaps and other fixed-income-like instruments follow a regressive WHT schedule: Maturity WHT Up to 180 days 22.5% From 181 to 360 days 20.0% From 361 to 720 days 17.5% Above 720 days 15.0% Deal Management • Rollover: Possible through NDFs, Options or swaps. All of them are net settled. • Unwinding: Possible through NDFs, Options or swaps. All of them are net settled. • Early Maturity: Possible through NDFs, Options or swaps. All of them are net settled. On-shore x Off-shore Markets • Both markets are connected but have different terms, pricing, liquidity and documentation settlement. • Off-shore NDFs are net settled in USD, fixing rate is EMTA (Emerging Markets Traders Association). • On-shore NDFs are net settled in BRL, fixing rate is the PTAX. • Spot liquidity is concentrated in the on-shore market; local market also allows for longer tenors (> 5 years). Citi Brazil 1.111 Paulista Avenue Zip Code 01311-920 Sao Paulo, Brazil FX Sales Contact: + 5511 4009 2666 CSG Sales Contact: +5511 4009 3273 CCB Sales Contact + 5511 4009 2002