the brazilian capital market and the bsm role – manage the investor compensation mechanism ... the...

The Brazilian Capital Market and the BSM Role 1 Restricted Confidential Confidential Internal Use Public

The Brazilian Capital Market and the BSM Role

February 2015 X

The Brazilian Capital Market and the BSM Role 2

AGENDA

Brazilian Capital Market

BM&FBOVESPA Business Model

BM&FBOVESPA Market Supervision - BSM

Overview

Main activities

Regulatory Framework


The Brazilian Capital Market - An stylized overview

Instruments Trading

Enviroments

BM&FBOVESPA (Exchange and

Organized OTC)

OTC

CETIP (SR Department)

BSM

The Regulator and the mandatory and voluntary SRO’s are complementary

CETIP (Organized OTC)

Regulators Mandatory

SRO

Voluntary

SRO

ANBIMA

Central Bank

Securities

Commission

(CVM)

Equities

Derivatives

Commodities

Corporate

bonds

Investment

Funds

Government

bonds

Financial

instruments


The BM&FBOVESPA Business Model

Listing (stocks, bonds, funds,

asset-backed securities)

Commodities (certification)

Trading and Services for issuers and commodities

Trading (stocks, ETFs, derivatives,

corporate and government bonds)

Central counterparty - CCP Clearing and settlement

(for all the products)

Central Securities Depository - CSD

(stocks and corporate bonds)

Securities lending (stocks and corporate

bonds)

Clearing and Depository activities

Other services

Custody (for funds and other

market participants)

Market data Index licensing Software licensing

OTC Derivatives Registration and

Collateral Management

An Horizontally and Vertically Integrated Exchange


• Federal Law 6.385/1976

– Makes provisions on the securities market and establishes the Brazilian Securities Commission (CVM)

– Provides that exchanges are auxiliary regulatory entities responsible for surveilling market activities

and market participants

• CVM Instruction 461/2007

– Regulates and governs regulated securities markets and makes provisions on the formation,

organization, operation and extinction of exchangesand organized over-the-counter markets

The Brazilian Capital Market - Regulatory Framework T

rad

ing

C

SD

• CVM Instructions 541, 542 and 543/2013

– Regulate the bookkeeping, the custody and centralized deposit of securities

• CVM 441/2006

– Final beneficiary owner model

CC

P

• Law 10.214/2001

– Systemically important clearinghouses must ensure the settlement (i.e. must act as CCPs)

• Resolution 2.882/2001 of the National Monetary Council

– Access criteria should be public and allow broad participation

• Central Bank rule 3.057/2001

– Regulations, manuals and safeguards mechanisms must be approved by the Central Bank


AGENDA

Brazilian Capital Market

BM&FBOVESPA Business Model

BM&FBOVESPA Market Supervision - BSM

Overview

Main activities

Regulatory Framework


A mandatory SRO

• Main responsibilities established by CVM Instruction 461/2007

– Oversee and supervise trades performed on the organized markets

– Investigate misconduct in compliance with laws and regulations

– Follow the Exchange and OTC activities

– Establish, prosecute and judge administrative cases

– Enforce penalties

• Assurances offered to the Self-Regulation Structure to perform its duties:

– Administrative, financial and budget management autonomy

– 3-year fixed term and stability to board members

– Board composed by a majority of independent members

– Dedicated technical staff

– Full access to information


Organizational Structure

Audit

(55)

Market

Surveillance

(21)

Analysis and

Strategy

(6)

Legal

(22)

Chief

Regulatory

Officer

Supervisory

Board

(12 members)

Secretariat and

support

(4)


Supervisory Board

Board regulated by CVM Instruction 461/2007

• Judge administrative cases

• Enforce penalties

Mandatory responsibilities

• Approves Work Program

• Hold opinions and jurisprudence

• Act on regulation improvement

Strategic duties


Audit - Auditing 100% of brokers

Enforcement

Education, enhanced of rules and others

MRP – Manage the Investor Compensation Mechanism

Market Surveillance - Monitoring 100% of trades

BSM Main Activities


Market Surveillance

Monitoring 100% of trades

Filters and Alerts

Penalties

Filing

Analysis(Team of experts)

Data BasesData mining and market

supervision solutions• Detect market abuses:

Insider trading

Front running

Manipulation

Money Laundering

Frauds

Churning

Others

What we do How we do


Market Surveillance

2014 results

100% of orders and trades

4.3 billions of orders 284.4 millions of trades

43,000 alerts

1.495 analysis

341 inquiries to brokers

176

Market Surveillance

Reports

• 176 Market Surveillance

Reports (“Cases”) initiated

‒ 163 of them closed until

December 31st

27 sent for enforcement

measures

28 sent to CVM tretament


Market Surveillance

• Cases of spoofing, layering and other “automated violations”

• Cases of internalization of orders

2014 highlights


Audit

• Mm

– d Auditing 100% of brokers

Type of Audit #

Operational audits 65

Pre-operational Audits 13

Audits in Investment Advisors 593

Specific Audits 12

Remote Audits n.a.

DMA 22

MRP (Investor Compensation Mechanism) 107

Items checked monthly:

Non-compliance with Financial

requirement

Transparency of the

intermediary’s business model

Control of individual investors’

orders and churning

Customer-financing practice

Selection of winners and losers


Audit

• In 2012 the BSM created a methodology to rank the results of the Participant’s

examinations

• This mechanism enables comparative analysis of the examination results (participant with

his own past and participant vis-à-vis other participants)

• The Participants with high ranks have the benefit of not being audited in follow one or two

next programs (the examination can be maintained if the participant requests)

• The standardized score obtained by the participant is intended only to improve controls

and should not be used in advertising or for commercial purposes

• This methodology optimizes the BSM allocation of resources and at the same time

generates a positive incentive for participants to enhance their controls seeking to receive

the benefit

• From the point of view of the governance of the Participants, this mechanism works as an

indicator of the progress of the internal control system. It also works as a mechanism for

encouraging Participant’s governance

Methodology for evaluating the results of

Participant’s examination




Audit

• 2008 to 2012

– 100 % of all Participants (78 brokers in 2012)

• 2013

– BSM created a methodology to rank the results of the Participant’s audits

– 2013 (based on 2012 examination’s results)

12 participants were exempted for a year

– 2014 (based on 2013 examination’s results)

4 participants were exempted for a year




Audit

Ex: Final Rating Standard Frequency Distribution (2012)


Enforcement

Enforcement

Acusations

Administrative Process

Punitive measures Persuasive measures

Claims to MRP

Audit

Market surveillance

Penalties

Letters

Enforcement Measures

2014:

25 prosecutions 2014:

144 Recommendation Letters

2 Censorship Letters


Enforcement

Enforcement

The Disciplinary Administrative Process

• Rules approved by Brazilian regulator (CVM) and public knowledge

• Legal full defense right

• Possibility to establish Settlement Agreement

• Large publicity of the decisions

• Final decision by Supervisory Board (no appeal to CVM)

• Penalties enforced by BSM are recognized and can be considered to reduce CVM

sanctions

• Penalties: Warning

Fines

Suspension

Disqualification


Support the market improvement

• Research in subjects of interests (for example, churning and HFT)

• Relationship with Regulators, others SROs, market institutions (brokers,

custodians etc.)

• Influence in regulation to improve standards

– Participation in several public hearings of CVM

– Contribution to improving BM&FBOVESPA’s rules

• Participation in international forums

– IOSCO, SROCC, COSRA, ISG and others

Enforcement Education and market enhanced


Support the market improvement

• Contribution to improving BM&FBOVESPA’s rules

– The new BM&FBOVESPA Access Regulation (Indirect Participants)

“PN / PNP Model”

• Workshop on “monitoring operations, internal controls and compliance”

• Workshop on “anti money laundering in the securities markets”

• Working Group on Conflitcs of Interest (COSRA)

• Task Force on Emerging Riskc (AMCC-IOSCO)

Enforcement 2014 Highlights


The Investor Indemnification Mechanism (MRP)

• Compensation to investors for losses incurred for reasons attributable to

intermediaries or resulting from custody services

• Prescription: 18 months, commencing from the date of the event

• Maximum claimable amount: R$ 70,000 per event

• The investor is entitled to appeal the surveillance board decision to the CVM

MRP – Investor Compensation Mechanism


The Investor Indemnification Mechanism (MRP)

2014 Highlights

# %

Archived 32 18%

Settlement or withdrawal 5 3%

Claims rejected 60 33%

Claims accepted (refund to investor) 83 46%

Total 180 100%

Claims concluded in 2014


Contact

Analysis, Strategy and International Affairs Department

+55 11 2565-4763

[email protected]

mailto:[email protected]



the brazilian capital market and the bsm role – manage the investor compensation mechanism ... the...

Documents