Addressing market needs

Author: | Published: 24 Apr 2015
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Brazil’s regulators are looking to overcome a market slump and increasing regional competition by simplifying rules and streamlining listing processes

In 2014 Brazil's market were stalled. Few companies were able to make issuances, events like the football World Cup temporarily halted the flow of deals, and questions about corruption and poor corporate governance raised red flags with investors.

In the year ahead the country is looking to move past this slump. Regulators are taking steps to align their systems more closely with international standards and make new products available to generate liquidity. Issuers can look forward to more simplified rules in the future to help them raise capital more easily and attract more foreign investors.

Leonardo Pereira, Chairman of Brazil's securities regulator, CVM discusses the plans to address the market's hurdles.

What are the main regulatory changes on the horizon?

In the process of reviewing and updating our rules, the Brazilian Securities and Exchange Commission (CVM) mandatorily takes into consideration the integration of the securities markets, and the consequent need to align our rules with international standards. The increasing relevance of capital markets as a source of finance also demands the simplification of investment structures and the preservation of the safety of the system.

Accordingly, we have been implementing a number of enhancements to our rules, including: (i) the successful convergence of the Brazilian GAAP to the international accountancy standards (IFRS) issued by the International Accounting Standard Board – IASB; (ii) advances in disclosure rules, particularly in terms of quality and objectivity of information provided by companies; (iii) the review of the normative framework of funds; and, (iv) measures resulting from the conclusions of a committee (Comitê Técnico de Ofertas Menores) formed by the CVM, Brazilian Securities, Commodities and Futures Exchange (BM&FBovespa) and other market institutions, to promote the access of small and medium sized companies to the capital markets.

Nonetheless, we are fully aware that the review and updating of our normative framework is a constant process, which leads our regulatory agenda to have some sensitive issues submitted to public hearing proceedings or to be discussed in the near future.

In this sense, we have already submitted to public hearing, among other topics, the review of the norms applicable to securities portfolio managers, the new rules regarding remote voting, and the distribution of COE (Certificado de Operações Estruturadas), a newly issued instrument, similar to the structured notes adopted in the international market.

There are also some other relevant themes currently studied, as part of the review of our norms regarding the activities of fiduciary agents and consultants, investments in participation funds, and the establishment of a framework properly addressing equity crowdfunding.

What are you doing to attract more issuers to the exchange? How has competition from other regional markets affected the CVM?

We are facing a situation where the role of capital markets has gained importance considering the shortage of conventional sources of finance. This is thanks to the stricter capital requirements adopted by banks after the 2008 crisis and to the governments' necessity to invest in infrastructure, create jobs and deliver sustainable growth, without affecting the fiscal balance.

In Brazil, this situation is even more concrete, considering that there is a very big need to finance infrastructure projects and support a sustainable development of small and medium sized companies.

In this sense, we are not unaware that Brazil is among the largest economies in the world, but has a capitalisation level lower than its potential. Whereas in countries with more expressive stock markets that capitalisation represents about 78% of its GDP, in Brazil this index represents only 57%.

Based on this assessment, the CVM has been fine-tuning its regulation to ensure the safety and sustainability of capital markets' development, attracting new investors, favouring long-term investments and removing hurdles to the access of small and medium sized companies to the capital markets, and enhancing its attractiveness to domestic and foreign investors.

We recently adjusted, for instance, our rules regarding the safety and credibility of market infrastructures, designing a chain of obligations and liabilities of market agents who work in the clearing, settlement, and recording of transactions. The new rules (CVM Instruction No 541, 542 and 543) ensure the integrity of securities issues, mitigating the risks associated with their safekeeping and transfer.

The establishment of a solid market infrastructure, for sure, is a mandatory feature of an attractive capital market. This is clearly aligned with the discussions held on global forums, particularly post-crisis, which suggest the strengthening of market infrastructure, preventing a new financial crisis.

The abovementioned successful conversion of our corporate internal reporting rules to the international accountancy standards is also evidence of our commitment to align our regulation and practices to the international standards. Through this change we are constituting a safe and credible environment for domestic and foreign investors, creating, by consequence, attractive conditions for companies.

The importance of consolidating these advantageous points is even more relevant considering that the competition with other regional markets has intensified in recent years. This has come about in light of the satisfactory economic indicators and the implementation of regulation enhancements of some of our neighbours, such as Chile, Colombia and Peru.

In my view, the development of these markets must not be seen as a concern for us, but as a real lever for the Brazilian capital markets, enabling the strengthening of profitable partnerships, and, ultimately, lifting South America to a more prominent place in the securities market's global outlook.

Are there any possibilities of regional or global partnerships with other exchanges?

The integration of the securities markets is a reality and, therefore, regulators and policy makers must jointly try to reduce and mitigate the risks of regulatory fragmentation. This is not possible without the strengthening of global financial regulatory institutions and an effective coordination. Actually, in this sense, the CVM has been actively participating in the most relevant international forums (that is, IOSCO, FSB, and IFRS Monitoring Board), in a constant exchange of experiences and ideas with representatives of other regulatory bodies.

In 2009, the CVM signed the IOSCO Multilateral Memorandum concerning consultation, cooperation and exchange of information, setting forth principles and mechanisms aiming for the fullest mutual assistance among more than a hundred domestic regulatory bodies. Such adhesion helped strengthen the CVM's supervision by providing a faster and safer way of sharing information regarding investigations of misconduct in the capital markets.

Furthermore, we also have a number of bilateral cooperation agreements with other regulatory bodies, including the SEC (US), ASIC (Australia) and several members of the EU, with practical results.

These agreements are helpful tools for improving the effectiveness of across-board investigations and enforcement activities, and, given the benefits, we are constantly working on strengthening those partnerships and on establishing new ones.

What are you doing to address the slow IPO market?

We are aware of the challenging times that the Brazilian economy, and, ultimately, our capital markets, are passing through. Given the circumstances, including the restructuring of premises and economic strategies, it is natural that investors would be wary in their decisions, postponing and reducing investments. Our mission, as regulators, is, on the one hand, to assure the resumption of confidence of those investors, and, on the other, to provide effective mechanisms to encourage companies to enter the capital markets.

We recently reviewed our regulation, enabling companies to launch public offerings of stocks and convertible debentures distributed with restricted efforts. Those offerings differ from standard offerings, in that there is no need to request registration of the plan with the CVM. Only qualified investors can participate in these public offerings with restricted efforts, and the deals cannot be marketed through road shows or the media.

The main benefit that has arisen from these proceedings, in my opinion, is the resulted celerity of the public offering, especially considering that, in difficult times, companies cannot afford to miss out on windows of opportunity.

Regulatory adjustments of this nature, along with the development of a consistent financial education, a solid investor protection policy, and the strengthening of our compliance and enforcement mechanisms – which have been top priorities for us – will certainly contribute to the safety and credibility of the Brazilian capital markets, and, consequently, pave the way for future growth.

How is fast track listing for stocks affecting the market? Do you anticipate any expansion or changes to this process?

As I mentioned before, fast track listing for stocks is, primarily, a need in times when windows of opportunity are scarce, and so cannot be missed by market agents.

In this sense, the recently adopted rule was well accepted by the market, and we have had positive feedback from bankers, companies, government officials and lawyers, who are seeing it as a way to help companies raise capital in a challenging market.

In the short-term, I think it is safe to say that such facilities will be mainly used by registered companies to introduce subsequent offerings, once the exemption of the offering register has increased the celerity of the process. I believe the predicted success of these special proceedings, with their facilities and reduced bureaucracy, teamed with the stabilisation of the economy, and the return of investor confidence, will lead to numerous IPOs by non-registered companies.

Can the market expect to see more complex or structured products entering or returning? What type of limitations or requirements do you plan to place on them?

The Brazilian market is reacting well to the COE (Certificado de Operações Estruturadas), the recently issued instrument that I previously referred to. It is a hybrid security including several financial products, usually a stock plus a derivative, which enables the offering of different investments for clients who wants to diversify risks, gathering fixed and variable incomes.

Statistics on 2014 activities show that this instrument has already achieved big investment figures. Last year, as I previously mentioned, the CVM submitted to a public hearing a proposal to include the COE in the list of assets that can be publicly offered with restricted efforts, to heighten the attractiveness of the product.

With the possibility of more complex and structured products in the marketplace, the CVM will always try to adequately balance market initiatives and ensure that safety levels are preserved focusing on investor protection and saved conduct norms.

Should we expect to see increases in investor protections?

We understand that the safe and sustainable development of capital markets should be built primarily on certain pillars. This includes the promotion of investor education and protection, a well-balanced risk based supervision plan for compliance purposes and a solid and credible enforcement process.

Firstly, we are implementing a policy focused on the expansion of financial education. This involves increasing the population's awareness of the opportunities to invest, improving understanding of the risks inherent to those investments, and attracting more resources to the market, on the basis that there will be more investors willing to trust the market with their savings.

In this sense, we already have adopted various initiatives, including the free distribution of thematic booklets on capital markets topics. A blog has also recently been created to disseminate academic papers and promote discussion on themes related to the capital market, approaching investors, students, teachers, researchers and other interested parties.

It seems clear to me that investors are more able to make conscious and grounded decisions to the extent they are better informed about companies' affairs, notably their financial situation and steps taken to sustain business in the long term. This is why we are constantly reviewing and enhancing our regulation to ensure the competitiveness and transparency of the market, providing a full and clear disclosure of information, aligned with the market and investors' needs.

For capital markets to achieve sustainable growth, investors need to feel safe, and this atmosphere of credibility will pave the way for more investment in Brazilian securities.

On the other hand, we also understand that the quality, strength and degree of our enforcement process are important indicators of credibility. We are committed to ensuring that our enforcement activities are consistent, efficient, proportional and capable of providing prompt responses. Ultimately, this encourages market participants to work within agreed rules of conduct, and sends a clear message to investors in terms of protection.

Are there other markets' regulatory and enforcement practices that you look to as an example?

As I previously stated, the CVM has been taking part in the most relevant global forums and discussions, as well as effectively collaborating with other regulatory bodies.

This data exchange influences the redesign of our regulation. We are constantly looking forward to align our norms to the international standards, and, at the same time, following well-established practices in specific areas, adapting them to our reality and needs.

Likewise, having identified through the review of our processes some bottlenecks in our monitoring of compliance and enforcement systems, the CVM has been implementing some improvements. This includes better use of technology and the strengthening of partnerships, at the domestic level, with public bodies, and self-regulatory and other independent organisations.

Considering the aforementioned increasing activity in the securities and derivatives markets, we make good use of our relationships with foreign organisations and bodies, which contributes to faster and safer sharing of information during investigations of misconduct in the capital markets.

Furthermore, the review of our enforcement rules also contemplates the implementation of practices that have already produced practical results in other jurisdictions, such as leniency agreements. A draft law has subsequently been proposed on this matter.

About the author

Leonardo Porciuncula Gomes Pereira
Executive chairman
Securities and Exchange Commission of Brazil (CVM)

Rio de Janeiro, Brazil
T: 55 21 3554-8242 / 55 21 3554-8245
F: 55 21 3554-8531

Leonardo Porciuncula Gomes Pereira is the chairman of the Securities and Exchange Commission of Brazil (CVM). He took office on November 5 2012 and his term expires on July 14 2017.

He represents CVM internationally at the IOSCO Board, Financial Stability Board and at the IFRS Monitoring Board. In Brazil, he has a seat at the Brazilian Technical Commission of Currency and Credit (COMOC) and at the Brazilian Committee of Financial Education (CONEF).

Before becoming CVM chairman, Pereira was executive vice president/CFO and a member of the executive board of Gol Linhas Aereas Inteligentes. Pereira has served as an officer and as a director in companies in different sectors of the Brazilian economy, including aviation, communications and agro business. He worked at Citibank for 13 years, in a number of roles in Brazil, Asia, Latin America and the US.

Pereira was also a member of the Latin America Round Table on Corporate Governance under the auspices of the OECD and of the corporate governance committee of the American Chamber of Commerce in Brazil.