Brazilian Securities Commission modernizes organized securities markets

On June 10, 2022, the Brazilian Securities Commission (CVM) issued CVM Resolution No. 135, with the objective of reforming the current regulatory framework of the regulated securities markets provided for in CVM Rule No. 461. In line with this reform, the CVM also issued Resolution No. 134 to adapt certain provisions regarding securities intermediation contained in CVM Resolution No. 35. Together, these two new resolutions modernize several aspects of securities market regulation in Brazil.

Block trading

In one of the most important innovations, CVM Resolution No. 135 allows for the possibility of conducting block trading of shares and equity securities in specific market segments or via special procedures in exchanges and organized over-the-counter markets.

Each year, the CVM will disclose the shares and equity securities that are eligible for block trading, as well as the respective minimum lot sizes.

The resolution defines block trading as trading that meets all of the following requirements:

• A minimum lot size equal to or greater than the size disclosed by the CVM;
• A single, indivisible block at both ends of the transaction – i.e., a buying investor and selling investor. Investment funds and managed portfolios subject to discretionary investment management and whose decisions are made by the same manager are considered to be a single investor;
• The participation of a securities distribution system member.

Block trading must be conducted in trading environments or systems that favor adequate price formation, except in situations where the CVM grants a specific exemption based on a reasoned request from the organized market administrator.

Special procedures

In another important change, CVM Rule No. 168 has been revoked. As a result, the organized market administrators are now in charge of setting the parameters for submitting transactions to special trading procedures. Such procedures must be included in the administrators’ rulebooks and then submitted for approval by the CVM.

Listing and admission to trading now distinct concepts

CVM Resolution No. 135 treats issuer listing and admission to trading as distinct concepts.

An issuer’s listing depends on it submitting a request and receiving a favorable decision from the organized market administrator, which must oversee the issuer’s compliance with the obligations imposed in its listing rules, as well as immediately communicate any decision to suspend or exclude trading to the administrators of other organized markets in which the securities are admitted to trading. The resolution provides for issuer listing as a precondition for the admission to trading certain securities specified in the resolution, such as shares.

In these cases, once the issuer’s listing is approved, the respective securities can be admitted to trading by the administrator that approved the listing, or by any other administrator (provided the issuer agrees). In the latter situation, specific procedures and controls must be put in place so that the administrator can immediately comply with a decision to suspend or exclude the trading reported by the administrator that approved the issuer’s listing.

In other cases, issuer listing is not necessary prior to admission to trading.

Self-regulation and loss compensation mechanism

After discussions on the public hearing, the CVM eventually decided to maintain the current self-regulation model without requiring a unified self-regulatory organization. However, CVM Resolution No. 135 does accept alternatives to the current model, such as joint self-regulation activities by organized markets administrators.

Given the lack of a single self-regulatory organization, the administrators will remain in charge of maintaining their own loss compensation mechanism.

Internalization

For now, the CVM has elected not to regulate the internalization of securities orders and will further analyze this matter. However, the Retail Liquidity Provider (RLP) mechanism remains in operation under the conditions the CVM has already approved.

Access screens for trading on foreign exchanges

CVM Resolution No. 135 will also make securities trading more flexible via access screens for trading on foreign stock exchanges. Consequently, the carrying out of securities transactions is now not only limited to qualified investors, as was previously defined.

Best execution

Finally, CVM Resolution No. 134 has established certain improvements in CVM Resolution No. 35 to include the possibility of competition between trading environments or systems and trading of the same securities in different markets.

By means of CVM Resolution No. 134, the regulator adopted a model where the duty of best execution (subject to certain criteria) lies with the intermediary, as opposed to the alternative of automatic routing of orders between trading systems.

As for unqualified investors, CVM Resolution No. 134 also provides that intermediaries must consider the total consideration (i.e., the price of securities and their execution costs, including any and all expenses borne by the investors) as the predominating factor when determining the best execution of orders.

CVM Resolution No. 135 becomes effective as of September 1, 2022, while CVM Resolution No. 134 takes effect as of January 2, 2023.

For further information on the new resolutions, please contact Mattos Filho’s Banking & Financial Services practice area.