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Global Bonds

global-bonds

1. What is it?

Contrary to a general definition internationally used, Global Bonds in Brazil are those national external debts notes that are traded elsewhere, in dollars. Such bonds cannot be traded by local investors in Brazil. However, they can still deal with Global Bonds futures, expiring between this year and 2040.

Global Bonds are quoted in PUs – unit price – which correspond to a value in dollars for each USD100.00 in the bond’s par value. Each Global Bonds contract has a par value of USD50,000.00.

Global Bonds futures are poor in liquidity, even though they can be traded without paying any premium or surcharge. It is mainly used as a hedging tool for those who own government notes and bonds. Global Bonds are daily settlement and have a guaranty margin, offering a better risk management perspective to the investor.

Note the buyer or seller of Global Bonds futures will not receive government bonds, but just dealing with future prices on them.

For daily settlements or by the maturity dates, values are converted in BRL using the PTAX exchange rate for dollars, considering the last trading day and credited in D+1 for daily updates and D+0 by the maturity date.

Each Global Bond contract, by the expiration date, has a specific interest rate and prices based on sovereign bonds for notes issued by Brazil’s national treasury or issued by any other country for the same reason.


2. Characteristics

Terminology

Global Bonds future terminology can be found as follows:

1. Global Bonds trading code is just “B”.

2. Expiry year.

Example:

B40 (Global Bond maturity by 2040)

The table below shows all negotiable Global Bonds:

Trading object

Code

Trading object

Code

Global Bond 2009

B09

Global Bond 2020

B20

Global Bond 2010

B10

Global Bond 2024

B24

Global Bond 2011

B11

Global Bond 2025

B25

Global Bond 2012

B12

Global Bond 2027

B27

Global Bond 2013

B13

Global Bond 2030

B30

Global Bond 2014

B14

Global Bond 2034

B34

Global Bond 2015

B15

Global Bond 2037

B37

Global Bond 2019

B19

Global Bond 2040

B40

Contract

Each contract comprises a USD 50,000.00 note, with quotations changing for each USD100. PU must be expressed as an integer and a decimal parts, with up to three decimal places.

Day Trade

It is possible to close a day trade (buying and selling futures with same expiry date in a same day) of Global Bonds.

Daily settlement

The daily settlement is nothing more than a mechanism used by BMF&Bovespa to balance the investor accounts. As futures change in a daily basis, generating credits or debts, investors are daily updated on their positions, earning or losing as prices change – in other words, they either get their profits or pay for their losses daily. The mechanism is a protection against any noncompliance among investors.

For Global Bonds, actual financial moves for daily updates happen the day after, or D+1, being calculated sequentially through the expiry date. Daily settlement, when positive, are credited to buyers of positions and deducted from sellers. If they are negative, so the opposite happens.

Guaranty margin

It is a value deposited in cash or notes which will covering any noncompliance of an investor in daily settlement. Usually to operate futures, the investor is forced to deposit a guarantee to mitigate risks. The margin is defined by the stock exchange, according to the analysis of the futures market.

The assets accept as guarantee include cash, gold, government or private bonds, letters of pledge and quotes at funds.

Operational costs

Expenses from investing in Global Bonds include:

Brokerage – it can change depending on the broker. However, most of them use the basic operational fees, stipulated by Bovespa. In this case, costs reach 0.2% for regular operations and 0.1% for the day trade, based on the theoretical redeem value.

Stock exchange fees – that includes emoluments and registering fees by BM&F, charged as follows.

Emoluments: The fees charged by the BMF values ​​related to trading services. They focus on contract negotiation (opening or closing position before maturity), exercise of options, registration and early settlement and assignment of rights procedure. In futures contracts Global Bonds, the fees are charged according to the table below:

Number of Contracts Emoluments
From To US$
1 25 0,53
26 50 0,50
51 200 0,45
201 250 0,42
251 400 0,39
Over 400 0,34

Liquidation charge: this charge regards to the liquidation of the contracts by the expiry, on top of clearing expenses. Usually, this charge is a fixed value, and has nothing to do with the volume of contracts negotiated. For Global Bonds, this charge stands at USD1.20 per contract.

Clearing fees: include all costs for following positions and receiving reports and filings made by the clearing house, as well as operational costs for holding inactive positions on derivatives. It affects all positions opened in contracts traded in the primary market (except for options and minicontracts) and OTC contracts. The fees are daily updated, and charged in the last work day on each month, by closing the positions or every time an investor transfers all positions to another one.

Fees are based in the number of positions opened by the calculation day, and can vary depending on the volume of contracts traded. The reduction factor and the daily rate remain to be applied to the business carried on and the open position is defined by contract.

For Global Bonds, the fees reach BRL0.0175 per contract and day.

Registry charge: a value charged to register the operation on the clearing house, that only applies to deals that open or close positions before the expiry date, and charged one day after those events.

The table of prices for registration is disclosed by the stock exchange based on average deals for the latest 21 trading sessions. Calculations are made in the last trading session of a week, and define registration charges for the following week.

Currently, registration charges stand as follows:

Number of Contracts Registration charge
From To US$
1 25 0,59
26 50 0,57
51 200 0,51
201 250 0,47
251 400 0,45
Over 400 0,39

Also, ISS taxes must be paid on operations.

Maturity

The months of maturity of the futures contract Global Bonds are: January, April, July and October, with an expiration date on the first business day of the delivery month.

Liquidation

By the expiration date, all positions that remain opened, after a last adjustment, wil be financially executed by the stock exchange, by registering the inverse operation of the position held.


3. Profitability and risks

Profits and risks from investing in Global Bonds are related to a serie of rates and indexes for the Brazilian market, commencing with the dollar exchange rate and passing through ratings, benchmark interest rates, etc. The Global Bonds futures contracts are widely used to hedge, ie to protect against country risk and the Brazilian foreign debt securities.


 4. Taxation

Taxes over Global Bonds futures follow the same logic of any other variable income investment. Income tax is equal to 15% of the sum of all daily adjustments (if positive) and is charged just when you close a position. Also, income withholding taxes of 0.005% are due over the full amount of gains.

For day trade operations, the income tax reaches 20% of profits, and the withholding tax other 1%.

All costs and fees paid for investing can be deducted from the income tax amount, including those from BMF&Bovespa. In case of losses, a compensation can be applied in any gains in the subsequential months, as long as the operations are similar.

The investor himself is responsible for paying all taxes, except when withholding taxes apply – then taxes must be accounted monthly and paid in every subsequential month.


5. Advantages

  • The top advantage for Global Bonds is the possibility of hedging positions against country-related risks and sovereign notes from Brazil.

6. Disadvantages

  • Daily updates;
  • Guaranty margin;
  • Income taxes;
  • Expiry dates, so you cannot undefinedly carry up positions, needing to postpone to a new expiry date if necessary;
  • High risk as variable income investment.

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