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Brazil: Innovations in capital markets

Alexei Bonamin Ricardo Mastropasqua
On December 20 2013, the Brazilian Exchange Securities Commission (CVM) issued a set of rules which regulate the rendering of services related to the Brazilian capital markets' infrastructure, as follows: (i) CVM Instruction 541 regulates matters regarding the centralised deposit of securities; (ii) CVM Instruction 542 governs the rendering of securities custody services; and (iii) CVM Instruction 543 regulates securities bookkeeping services and the issuance of securities certificates.

In accordance with CVM Instruction 541, the centralised deposit service of securities comprises the following activities: (i) securities' safekeeping by the central depository; (ii) controlling the chain of ownership of securities in the deposit accounts maintained on behalf of investors; (iii) restricting practices related to securities' disposal by the ultimate investor or by any third party outside the central depository environment; and (iv) the handling of trading instructions and of incidental events that affect the deposited securities, with the corresponding records on the deposit accounts. CVM Instruction 541 does not apply to positions held in the derivatives market outside the central depository environment. However, it does apply to the establishment of liens and encumbrances on positions held in derivative agreements of any kind, provided that the central depository is also authorised to provide registration services to such agreements. CVM Instruction 541 also applies to financial bills and other instruments that are subject to the jurisdiction of CVM.

In accordance with CVM Instruction 542, the following legal entities may apply for authorisation to render securities custody services: commercial, multi-service, or investment banks; saving banks; securities brokers; securities dealerships; and entities that provide clearing and settlement services and centralised deposit of securities. The custodian must: (i) establish and maintain satisfactory operational and technological capacity for the performance of its activities to assure the quality and confidentiality of information; and (ii) establish and maintain procedures and safe systems, in order to register, process, and control positions and custody accounts. The custodian must demonstrate sufficient economic and financial capacity to carry out its operations, and to provide services of securities' physical custody. The custodian must maintain a safekeeping structure, with restricted access, and security mechanisms that ensure the integrity of the securities. CVM Instruction 542 applies to financial bills and other instruments, but it does not apply to positions held in the derivatives market.

As per CVM Instruction 543, all financial institutions may apply for the authorisation to render securities bookkeeping services. The bookkeeper must have safe and suitable systems to ensure the execution of the duties and obligations inherent to the activities which it intends to carry out. The bookkeeping services comprise: (i) opening and maintaining registry books within electronic systems; (ii) registering information related to securities' ownership, and rights of fruition or guaranty and other liens on the securities; (iii) handling of movement instructions received from the securities' holder or authorised persons; (iv) carrying out the procedures and records for application of the centralised deposit scheme to the securities, if applicable; and (v) handling of incidental events which affect the securities. The bookkeeper that provides services of issuance of securities certificates must require the specific approval from the CVM before each issuance. Acting as certificate issuer agent, the bookkeeper has the following obligations: (i) cancelling and amending the certificates; (ii) controlling the securities represented by the issued certificates, returning them to the holders of the securities, whenever requested; and (iii) performing the acts for replacement of the certificates in the shortest term. This period may not exceed 30 days from the date of receipt of the relevant documents. CVM Instruction 543 does not apply to positions held in the derivatives market. It applies to financial bills and other instruments that are subject to the jurisdiction of CVM in the case of public distribution.

Finally, such new rules on centralised deposit, custody and bookkeeping will come into full force and effect on July 1 2014, and the institutions already duly authorised to operate in any such capacity will have a period of 18 months from this date to prepare for the provisions of CVM Instructions 541, 542 and 543.

Alexei Bonamin and Ricardo Mastropasqua

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