New Rules On Market Infrastructure In Brazil

On December 20, 2013, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) issued a set of Instructions that regulate the rendering of services related to the infrastructure of the Brazilian securities market, as follows: (i) CVM Instruction No. 541 deals with the provision of centralized deposit of securities; (ii) CVM Instruction No. 542 rules on the provision of securities custody services; (iii) CVM Instruction No. 543 is about the securities bookkeeping services and the issuance of securities certificates; and (iv) CVM Instruction No. 544 amends CVM Instruction No. 461, of October 23, 2007, which contains the securities market regulation and provides on the formation, organization, operation and dissolution of stock exchanges, futures and commodities exchanges, organized markets and non-organized markets.

Preliminary Remarks

With these standards, CVM modernizes and improves the regime applied to important activities of market infrastructure related to the existence and possession of financial assets publicly offered or traded on organized markets. The main objective of the new standards is to ensure conditions for the secure development of the Brazilian market, in line with the principles and standards discussed worldwide as suitable to prevent new financial crises.

The new rules ensure that the securities traded in the Brazilian market and their respective ballasts in fact exist, that they are available for trading and that, once acquired, they belong to the investor that have purchased such securities. This model is based on a chain of obligations and responsibilities involving the bookkeepers (escrituradores), the custodians (custodiantes) and central depositories (depositários centrais). The bookkeepers act as keepers of the records on the issuance of book-entry assets. The custodians are responsible for the safekeeping of assets physically issued or are holders of positions of custody of clients in central depositories. The central depositories are essential for the trading of the assets in the organized markets, concentrating all the acts corresponding to the assets deposited therein.

Basically the obligations and responsibilities among these different players are divided as follows: (a) certain securities issued either in book-entry form or physically are guarded by an authorized custodian or registered in a bookkeeper; (b) the trust property of this asset (the securities) is passed to the central depository that becomes its holder before the custodian or the bookkeeper, and this is the procedure to "immobilize" the asset; (c) this procedure also allows that the same asset be registered in the internal records of the central depository, in which the investor is identified as the owner of such asset; (d) with the trading of the asset, its ownership is transferred to the new investor in the records of the central depository; and (e) the investor is always represented by a custodian before the central depository. In this case, "custody" means the provision of service by the custodian to the investor.

Central Depository

The central depository must be a legal entity duly authorized by CVM. Any legal entity incorporated under the form of joint-stock company (sociedade por ações) or a partnership (associação), that proves to have financial, technical and operational conditions, as well as internal controls and segregation of activities suitable and sufficient to meet the obligations established in CVM Instr. 541/2013, may apply for this authorization. The centralized deposit service of securities comprises the following activities: (i) the guard of the securities by the central depository; (ii) the control of ownership of the securities in the deposit accounts maintained on behalf of the investors; (iii) imposing restrictions on the practice of acts of disposal of securities by the ultimate investor or by any third party outside the environment of the central depository; and (iv) the treatment of the instructions for handling and the incidental events on the deposited securities, with the corresponding records on the deposit accounts.

The securities deposited in centralized deposit accounts are represented and moved around only in the form of book-entry records made in these accounts. The term "investor" means any individual or legal entity, any investment fund, any investment club or any non-resident investor, in the name of who/whom the transactions with securities are made and that, in the capacity of client of the custodian, maintains an indirect relationship with the central depository.

CVM Instr. 541/2013 does not apply to positions held in the derivatives market outside the environment of the central depository. It applies, however, to the establishment...