How Structured Transaction Certificates Work

The Structured Operations Certificates (COEs) emerged as a sophisticated alternative in the Brazilian financial market.

In this sense, combining flexibility, return potential and protection in a single product.

However, its complexity can intimidate less experienced investors.

After all, how do these instruments that promise to balance risk and reward work?

This article explores in detail how COEs work, offering a clear overview, practical examples, an illuminating analogy, relevant statistics and answers to the most common questions.

Our goal is to demystify the Structured Operations Certificates, showing how they can fit into an investment strategy.

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What are Structured Operations Certificates?

To begin with, the Structured Operations Certificates are hybrid financial instruments that combine fixed income and variable income elements.

Issued by financial institutions, such as banks, COEs allow investors to have exposure to different assets such as stocks, indices, currencies or commodities without having to purchase them directly.

In essence, they are contracts that offer returns linked to the performance of an underlying asset, with structures that may include full or partial protection of the invested capital.

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Unlike other investments, such as stocks or funds, COEs have a defined maturity date and previously established return scenarios.

This means that when investing, you know exactly what the potential gains or losses are, depending on the behavior of the underlying asset.

For example, a COE may offer 100% of protected capital if the Ibovespa index falls, but pay a return of 150% of the index's appreciation if it rises.

This predictability is one of the factors that attract investors seeking diversification with risk control.

Furthermore, COEs are regulated by the Brazilian Securities and Exchange Commission (CVM), ensuring transparency and legal certainty.

However, the complexity of the structures requires the investor to understand the terms of the contract, such as the term, the underlying asset and the profit or loss scenarios.

Therefore, before investing, it is essential to analyze the Essential Information Document (EID), which details all the conditions of the product.

How do Structured Operations Certificates work?

Now that we understand the concept, let's explore how they work. Structured Operations Certificates.

In simple terms, a COE is a financial “package” that combines derivatives (such as options and futures) with a secured or partially secured capital structure.

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The issuing bank uses these derivatives to create return scenarios based on the performance of an asset, such as the S&P 500 index or the price of gold.

The investor, when buying the COE, is essentially betting on these scenarios.

For example, imagine a COE with full capital protection and pegged to the Nasdaq index.

If, at maturity, the index has appreciated by 20%, the COE can pay 100% of this appreciation, that is, a return of 20% on the invested capital.

If the index falls, the investor receives back the initial amount invested, without losses (but also without gains).

This structure is attractive because it limits the downside, but the upside can be equally limited, depending on the contract.

Some COEs, for example, set a gain cap, such as 30%, even if the underlying asset rises further.

Another crucial aspect is taxation. COEs follow the regressive Income Tax table, with rates ranging from 22.5% to 15%, depending on the investment term.

Furthermore, they are not covered by the Credit Guarantee Fund (FGC), which means that the investor is exposed to the credit risk of the issuing institution.

Therefore, choosing a solid bank is as important as understanding the COE structure.

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Advantages and risks of COEs

One of the biggest advantages of Structured Operations Certificates is the possibility of accessing complex markets without the need for advanced technical knowledge.

For example, an investor who wants to profit from the appreciation of the euro against the real, but does not want to operate in the foreign exchange market, can acquire a COE linked to this relationship.

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This accessibility democratizes investments previously restricted to large players, such as hedge funds.

However, COEs are not without risk.

In addition to the issuer's credit risk, there is the issue of liquidity.

Unlike stocks, which can be sold at any time, COEs generally do not have an active secondary market, meaning the investor must wait for maturity to redeem the capital.

According to data from CVM, in 2023, the volume of COE issuances in Brazil reached R$15 billion, but only 5% of investors redeemed before maturity, highlighting low liquidity.

Furthermore, complexity can be a trap.

Many investors are attracted by promises of high returns, but do not understand the loss scenarios or gain limitations.

A useful analogy is to think of COEs as dining at a restaurant with a fixed menu: you know what you’ll be served and can enjoy fancy dishes, but you can’t change the ingredients or leave before the meal is finished.

Therefore, COEs require patience and clarity about the conditions of the financial “menu”.

Practical examples of COEs

To illustrate, consider the following fictitious example: COE Ibovespa Valuation.

An investor invests R$ 10,000 in a COE with a 3-year term, full capital protection and linked to the Ibovespa index.

The contract stipulates that if the Ibovespa rises, the investor receives 120% of the appreciation; if it falls, he receives R$ 10,000 back.

Suppose that, at maturity, the Ibovespa has risen 25%. The return would be 120% of 25%, that is, 30%, equivalent to R$ 3,000.

The investor redeems R$ 13,000, minus taxes.

Another example is the COE Global Tech, linked to an index of technology companies, such as the Nasdaq 100, with partial capital protection of 80% and a term of 4 years.

An investor applies R$ 20,000, and the contract promises 150% of the index's appreciation, with a ceiling of 40%.

If the Nasdaq rises 50%, the return is capped at 40%, i.e. R$ 8,000. If the index falls 30%, the investor loses 20% of capital (above the 80% protection), redeeming R$ 16,000.

These examples show how scenarios vary depending on the COE structure.

Both cases highlight the importance of reading the DIE and aligning the COE with the risk profile.

The question is: would you be willing to give up liquidity for a product that promises protection and earning potential?

The answer depends on your financial goals and risk tolerance.

Frequently asked questions about Structured Operations Certificates

Many investors are hesitant about COEs due to concerns about their mechanics and risks.

Below, we have compiled the most common questions into a clear and informative table, with answers based on regulatory information and market practices.

Why consider COEs in your strategy?

In a scenario of high interest rates and market volatility, Structured Operations Certificates offer an alternative for those seeking diversification without giving up a certain predictability.

They allow exposure to global assets, such as foreign indices or commodities, that would be difficult to access directly.

Furthermore, the possibility of capital protection attracts conservative investors who wish to experiment with variable income.

On the other hand, it is essential to consider implicit costs, such as fees embedded in the COE structuring, and the lack of liquidity.

More experienced investors may prefer to build their own derivatives strategies, but for most, COEs simplify the process.

Thus, they are particularly useful for those who want a “shortcut” to complex markets, with previously mapped risks.

In conclusion, COEs are powerful tools, but they require study and alignment with financial objectives.

As with any investment, knowledge is key to avoiding surprises.

When considering the Structured Operations Certificates, evaluate the issuer, read the DIE and ask yourself: does this product meet my expectations of return and security?

With the answer in hand, you will be better prepared to decide.