Brazil’s new duplicata escritural regulations

Learn about Brazil’s new duplicata escritural regulations and how they are revolutionizing the factoring industry.  

Revolutionizing factoring: Brazil’s new duplicata escritural regulations 

Join KLYM to learn about Brazil’s new duplicata escritural regulations and how they are revolutionizing the factoring industry. For this first entry of our KLYM Brazil blog, let’s dive into the interesting developments reshaping Brazil’s factoring industry from a regulatory perspective. This comprehensive guide explores the key changes introduced by these regulations and their implications for businesses in Brazil. 

A duplicata is a financial instrument commonly used in Brazil for short-term liquity, and these new regulations are set to transform the way it operates. Discover the benefits of this modernized system, including faster and more secure transactions, increased transparency, and improved access to credit thanks to a centralized reporting system and a new book-entry system (duplicata escritural). We delve into the impact that these developments will have on the Brazilian trade finance landscape. Stay ahead of the curve and gain a deeper understanding of the future of Brazilian factoring. 

Maria Londoño, General Counsel at KLYM, discuss the transformative changes occurring in Brazil’s factoring landscape. From historical practices to regulatory shifts, to market insights, we’re here to keep you informed and engaged.  

Traditional Factoring and Regulatory Evolution  

For years, Brazilian factoring companies have played a crucial role in providing working capital to small and medium-sized businesses. The traditional factoring model involved a triangular financial operation, where a factoring company purchased accounts receivable in the form of trade bills (duplicatas) from its client (the sacador) and assumed the responsibility of collecting from the sacador’s customers (the sacado). 

However, the market operated in a high-risk, high-return environment marked by high interest rates, limited traceability, and a lack of transparent information on potential funders. The absence of centralized receivables registration led to the acquisition of entire flows of receivables by mutual investment funds (FIDCs), restricting negotiation capabilities. 

Although factoring has existed in Brazil for more than 40 years, it had no specific regulation. Nevertheless, as of 2018, Law No. 13,775/18, which regulates the book-entry duplicate (duplicata escritural), was sanctioned, with the goal of reducing the overall cost for credit for sellers and improving legal certainty for funders, benefiting especially small and medium-sized companies. 

Brazil’s regulatory framework is evolving to foster a more competitive and dynamic factoring market. Under the updated regulations, sacadores can now individualize, organize, and share their receivables schedule, negotiating with multiple institutions simultaneously. Funders are no longer required to retain collateral equivalent to the entire flow of receivables, unlocking a significant amount of capital. 

Updated Receivables Central Registry Regulations  

Recent developments have taken the form of revamped regulations from Brazil’s Central Bank (BCB Resolution No. 339/23), based on interactions with funders, entities that will operate as bookkeepers of book-entry duplicates, and other stakeholders. These regulations govern the issuance, registration, centralized deposit, and negotiation of book-entry duplicates. This marks a significant shift from the existing norms (BCB Circular No. 4016/20), aiming to enhance transparency, accessibility, and competition and ease financial settlement within the factoring ecosystem. 

 The updates include: 

–> The introduction of individualized receivables organization and sharing, fostering a more competitive funding market. 

–> An evolving settlement system to ensure smooth operations within the central registry system. 

–> Improved criteria for fees charged by bookkeepers of book-entry duplicates delivering more transparency and predictability to funders with respect to transaction costs. 

–> Continuous efforts to refine settlement mechanisms to promote efficiency and reliability. 

The Players in Brazil’s Book-Entry Duplicate System  

The players in Brazil’s book-entry duplicate system are described in BCB Resolution No. 339/23. As the landscape transforms, understanding the key players becomes essential. 

Service Providers 

Before learning about the 4 main service providers in Brazil, let’s understand some key terms: 

–> Bookkeepers: these authorized entities maintain electronic records of each book-entry duplicate’s creation and life cycle.  

–> Registration entities: legal entities facilitating financial asset registration and transfer events, operating on a principal or ancillary basis. 

–> Central depository: the legal entity responsible for the central information system, a crucial hub for seamless operations. In Brazil, only B3 currently operates as a Central Depository, executing the centralized safekeeping of assets, the treatment of actions deliberated by the issuers, consequent security interest, periodical reconciliation of the amounts in balance and the handling of assets, among other activities. 

–> Sacado: the buyer of goods or services that initiated the book-entry duplicate’s creation. 

–> Sacador: the seller owed the amounts stated in the book-entry duplicate. 

–> Funder: the beneficiary of the settlement payment, having acquired book-entry duplicates from the sacador. 

The following entities are both accredited bookkeepers and registration entities:   

1. TAG: is a Financial Market Infrastructure operating as receivables register, which enables asset management through modern and innovative platforms and tools. TAG is authorized to register receivables arising from credit or debit card transactions, whether they take place in a physical or online environment. 

2. B3 S.A. – Brasil, Bolsa, Balcão: developed a business model to allow financers and creditors to trade receivables in a safe electronic environment. The trade bills will be accounted for and registered after assignors have issued them. 

3. CERC Central de Recebíveis S.A.: founded in 2015, CERC is the first specialized receivables register authorized to operate by the Central Bank of Brazil. As a financial market infrastructure, its focus is on increasing security and transparency in the use of financial instruments. The platform is prepared to register insurance, trade bills, credit card receivables, bank bonds, agribusiness and real estate receivables, among others. As a register specialized in receivables, financiers rely on CERC so that a larger group of companies can use their receivables in credit operations and have access to capital to reinvest in their business and grow. 

4. C3 Registradora (Nuclea): created as a result of the National Monetary Council’s determination that all portfolio assignment operations for personal credit contracts, CDC, vehicle financing and payroll loans should be registered with C3. Through C3, financial institutions, FIDCs and other entities authorized by the Central Bank guarantee greater transparency and security for portfolio assignment operations. C3 Registradora’s aim is to prevent the same contract from being sold to more than one buyer, i.e. used as collateral in more than one portfolio assignment operation. 

Payment Methods under the New Regulations 

The heart of any financial system lies in its payment methods. Brazil’s new central registry system introduces three innovative settlement methods for book-entry duplicates, as provided for in BCB Resolution No. 339/23: 

–> Bilateral Settlement: this method involves direct payment from the sacado to the sacador or funder. Payment instruments identifying each book-entry duplicate streamline the process. 

–> Automated Payments: a fully automated system minimizes the need for additional sacado instructions, improving efficiency and reducing friction. 

–> Bookkeeper as Middleman: in this system, the bookkeeper facilitates settlements between the sacado and its payment agent, reducing the sacado’s administrative burden. 

Efforts are ongoing to refine the operations of each settlement method within the central registry system, ensuring a seamless experience for all stakeholders. 

The introduction of Duplicata Escriturais in Brazil marks a milestone in the factoring industry. This digital system revolutionizes the way factoring transactions are conducted, offering benefits such as speed, efficiency, and enhanced security. In the last years, the industry has operated based on traditional factoring practices, which involved the assignment of packaged receivables to a third party, typically a financial institution, in exchange for immediate cash flow. This process relied on specific legal instruments known as the “duplicatas,” which provided the necessary legal framework for the packaged transfer of receivables. 

However, traditional duplicatas were susceptible to fraud and tampering, as they were physical documents that could be easily misplaced or forged. By transitioning to a centralized digital platform, the risk of fraud is minimized, and the integrity of the factoring process is strengthened allowing for the individualized negotiation of receivables. This increased security not only protects the interests of the parties involved but also boosts investor confidence in the factoring industry. 

As the industry continues to adapt to these regulatory changes, we can expect to see further developments that will shape the future of factoring in Brazil. Stay tuned for more updates from KLYM as we navigate this exciting journey together.  

Conclusion 

The factoring landscape in Brazil is undergoing a remarkable transformation, driven by forward-looking regulatory changes and an evolving ecosystem of players. As we continue to witness these advances, KLYM remains committed to simplifying factoring for funders and expanding SMEs’ funding horizons across the Americas. 

In conclusion, Brazil’s new duplicata escritural regulations are revolutionizing the factoring industry in the country. The transition from traditional paper-based duplicatas to digitalized instruments brings numerous benefits, including increased accessibility for SMEs, improved security and transparency, and enhanced operational efficiency.  

As the factoring landscape continues to evolve, it is important for businesses and funders to stay informed and adapt to these transformative changes. At KLYM, we are committed to providing the necessary knowledge and tools to navigate this new era of factoring in Brazil. Stay tuned for more updates and insights on our KLYM Brazil blog. Also, you can see the central bank’s updates on duplicates here.