On 8 October 2014, Brazil enacted Provisional Measure 656 (Medida Provisória 656, or MP 656), creating a new security for Brazilian financial institutions called Letra Imobiliária Garantida (LIG), the local equivalent of covered bonds for the real estate market. The LIG is a debt security with both direct recourse to the issuing financial institution as well as a claim to an asset portfolio (Carteira de Ativos), subject to a fiduciary regime, and issued in book-entry form through the registration in a central depository authorized by the Brazilian Central Bank. Similar to other Brazilian financial instruments of the same nature, individuals resident in Brazil or investors living abroad are generally exempt from local income tax on capital gains and income from investments in LIGs, however, this is still subject to further regulations and amendments before the MP 656 turns into law. The Brazilian finance minister praised this new instrument and said that the LIG will create additional funding for the real estate credit market and attract foreign investment.

According to MP 656, the asset portfolio may be comprised of real estate loans, securities issued by the Brazilian National Treasury, derivatives instruments entered into through a guaranteeing central counterparty, or other assets to be authorized by the Brazilian National Monetary Council. Currently, it is not clear what types of “real estate loans” may be part of the asset portfolio (for example, whether non-prime residential loans or commercial loans could be included); more detail will likely come when the Brazilian National Monetary Council issues regulations covering LIGs.

Given the fiduciary nature of this new security, financial institutions must appoint a trustee to oversee the assets comprising the asset portfolio and to represent the interests of LIG holders. Moreover, the asset portfolio constitutes a segregated pool of assets (patrimônio de afetação) from the financial institution’s assets, and therefore the asset pool is not subject to claims of creditors of the issuing financial institution.