Brazil's limited investment universe just got smaller. A few weeks ago the country's central bank issued Resolution 2720, which ostensibly promotes greater transparency in the market by forbidding pension funds from buying fixed-income paper issued by privately held companies.

Any company that is not registered with the Brazilian securities exchange commission, Comissao de Valores Mobiliarios, is considered private. As such, the maximum maturity for their paper is 180 days. Resolution 2720 requires that pension funds invest in notes with maturities longer than 180 days, which effectively bans them from purchasing private companies' notes.

The resolution has sparked heated debate in the local capital markets. "Private companies have disclosure policies and have to meet certain standards, so the justification of promoting greater transparency is not really there," said Marcio Guedes, director of debt capital markets at Brazilian bank, Unibanco. "By promoting paper with longer maturities the central bank is harming the smaller investors who can't afford to buy this type of notes. Many players in the market are still trying to understand why the central bank did this."

Experts agreed that the measure is at least partly a way to promote government-issued notes. "The resolution greatly constricts the investment alternatives for local pension funds," explained Luiz Roberto de Assis, a lawyer with Levy & Salomao. "On the surface, it is intended to ensure that pension funds invest in reliable paper but what they are really trying to do is add liquidity to federal bonds."

Measures favoring government-issued paper are not a novelty in Brazil. Back in the early 1990s a resolution establishing risk criteria for bank loans determined that private companies had a 100% risk of defaulting, while government-owned companies had a meager zero percent risk attached.

"Resolution 2720 has proved extremely unpopular since it came out a few weeks ago" said Assis. "According to a recent article in our leading financial newspaper, Gazeta Mercantil, amendments to the resolution are expected in the near future."

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