Third Resolution R-CNMV-2019-16-MV: Regulation for Establishing and Operating in the OTC Market and Securities Transaction Recording Systems

CERTIFICATION

The undersigned, Lic. Ervin Novas Bello, General Manager of the Central Bank of the Dominican Republic (hereinafter, "Central Bank"), on behalf of the Governor of the Central Bank, Ex Officio Member and President of the National Securities Market Council (hereinafter, "Council"); and Licda. Fabel María Sandoval Ventura, Secretary of the Council, CERTIFY that the text below constitutes an exact and complete copy transcribed from the original of the Third Resolution, R-CNMV-2019-16-MV, adopted by said body in the meeting held on Tuesday, July 2, 2019:

"THIRD RESOLUTION OF THE NATIONAL SECURITIES MARKET COUNCIL DATED JULY 2, 2019. R-CNMV-2019-16-MV

REFERENCE: Approval of the Regulation for Establishing and Operating in the OTC Market and Securities Transaction Recording Systems.

WHEREAS:

That in compliance with Law No. 249-17, of the Securities Market of the Dominican Republic, promulgated on December 19, 2017 (hereinafter "Law No. 249-17"), as well as what is provided by the Internal Regulation of the National Securities Market Council (hereinafter "Internal Regulation of the Council"), adopted by said collegiate body through the First Resolution, R-CNMV-2018-06-MV, dated November 29, 2018; on Tuesday, July 2, 2019, the Superintendent of the Securities Market submitted to the knowledge and approval of the National Securities Market Council (hereinafter "the Council") the definitive version of the draft Regulation for Establishing and Operating in the OTC Market and Securities Transaction Recording Systems (hereinafter "the Draft Regulation").

That the Council, in compliance with the attributes and powers conferred upon it by articles 13, literal 5, and 25 of Law No. 249-17, duly convened, deems it appropriate to state the following:

CONSIDERING:

1. That article 13, numeral 5, of Law No. 249-17 confers upon the Council, as the superior body of the Securities Market Superintendence (hereinafter "the Superintendence"), the attribute to "(d)ictate, upon the proposal of the Superintendent, the regulations for the application of this law."

2. That article 25 of the aforementioned Law No. 249-17 provides that "(e) the Council is the competent body to establish regulations regarding the securities market activities indicated in this law."

3. That in compliance with Law No. 200-04, General Law of Free Access to Public Information, dated February 25, 2005, and its implementing regulation, approved by Decree No. 130-05, dated February 25, 2005, the preliminary version of the Draft Regulation was published for consultation purposes by interested sectors from December 24, 2018, to February 1, 2019, inclusive.

4. That as a result of said consultative process, observations were received from the Ministry of Finance, CEVALDOM Centralized Securities Depository, S.A., the Association of Stock Exchanges of the Dominican Republic (APB), the Stock Exchange of the Dominican Republic (BVRD), the Association of Commercial Banks of the Dominican Republic (ABA), the Dominican Association of Investment Fund Management Companies (ADOSAFI), and CCI Stock Exchange, S.A.

5. That, likewise, as part of the administrative procedure prior to the definitive approval of the Draft Regulation, and in attention to the principles of transparency and participation, various working groups with interested sectors were held during the month of June 2019.

6. That the observations received were duly analyzed and weighed by a technical team of the Superintendence, as well as their external national and international advisors, determining that ninety-one percent (91%) of the observations could be favorably accepted for incorporation into the definitive version of the Draft Regulation.

7. That among the main observations that were accepted, the following stand out:

   • Elimination of the definitions of "Closing of the operation," "Market Maker Program," "Essential Facility," and "Public Debt Securities."
   • Elimination of obligations related to operation closing documentation, obligation to have public buy and sell offers, and participation related to a market maker program.
   • Modification of the definition of "File Structure," to provide greater precision.
   • Modification regarding the subcontracting of services by the administrator of the securities transaction recording system.
   • Modification in technological system tests, in the approval of the adhesion contract model and its modifications, in the entry of information for registration, as well as for non-user counterparties of the same recording system.

8. That the Draft Regulation aims to establish the provisions regulating the conditions to operate in the OTC market and the securities transaction recording systems.

9. That prior to the promulgation of Law No. 249-17, there were no specific legal provisions to regulate the OTC market, despite being the most used and extended procedure to buy and sell securities, it is by virtue of said law that a legal framework is established to regulate the OTC market and securities transaction recording systems are introduced, in accordance with international standards in the matter.

10. That the Draft Regulation, which has been prepared in accordance with international best practices on the subject and regulations consulted from different countries, including Colombia and Spain; is of great importance and interest, while constituting an innovative legal instrument for the development and functioning of an orderly, efficient, and transparent securities market.

HAVING SEEN:

a. The Constitution of the Dominican Republic, voted and proclaimed by the National Assembly on June 13, 2015, published on July 10, 2015.

b. Law No. 249-17, of the Securities Market, promulgated on December 19, 2017.

c. Law No. 107-13, on the Rights of Persons in their Relations with the Administration and Administrative Procedure, dated August 6, 2013.

d. Law No. 200-04, General Law of Free Access to Public Information, dated February 25, 2005.

e. The Internal Regulation of the National Securities Market Council, No. R-CNMV-2018-06-MV, issued through the First Resolution of the National Securities Market Council dated November 29, 2018.

f. The Tariff Regulation for Regulation Concepts and for the Services of the Securities Market Superintendence, No. R-CNMV-2018-10-MV, issued through the First Resolution of the National Securities Market Council dated December 11, 2018.

g. The Regulation of the General Law of Free Access to Public Information, approved by Decree No. 130-05, dated February 25, 2005.

h. The Principles Applicable to Financial Market Infrastructures issued by the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO) dated February 2019.

i. The matrix prepared by the technical team of the Superintendence, which collects the observations and comments of the entities that participated in the public consultation.

j. The other documents that make up the file.

THEREFORE:

After having studied and deliberated on the matter, the National Securities Market Council, in the exercise of the powers conferred upon it by Law No. 249-17, by unanimous vote of its members, attending to the reasons exposed,

RESOLVES:

FIRST: APPROVE the definitive version of the Draft Regulation for Establishing and Operating in the OTC Market and Securities Transaction Recording Systems, the text of which is transcribed below:

"REGULATION FOR ESTABLISHING AND OPERATING IN THE OTC MARKET AND SECURITIES TRANSACTION RECORDING SYSTEMS

TITLE I

GENERAL PROVISIONS

CHAPTER I

Object and Scope

Article 1. Object. This Regulation aims to establish the provisions relative to the regulation of the conditions to operate in the OTC market and the securities transaction recording systems, in accordance with what is established by Law No. 249-17 of the Securities Market, promulgated on December 19, 2017, and in accordance with international standards in the matter.

Article 2. Scope. The provisions of this Regulation shall be applicable to value intermediaries acting on their own account and for their clients, and to other institutional investors, acting on their own account or for autonomous portfolios that operate in the OTC market and exclusively in said context, as well as to the administrators of securities transaction recording systems.

CHAPTER II

Definitions

Article 3. Definitions. For the purposes of this Regulation, the following definitions are established:

a) Confirmation: Procedure by which the information specifying the terms of an agreed operation is verified, corrected, or approved, as established in articles 34 (Entry of information for registration), 35 (Validation), and 36 (Confirmation) of this Regulation.

b) Law: Is Law No. 249-17 of the Securities Market of the Dominican Republic, promulgated on December 19, 2017.

c) Agreed Operation: Operation whose conditions were previously agreed upon, but which has not yet been contracted.

d) Structured Operation: Is an operation derived from a contractual agreement, which involves a series of linked transactions, with settlement on different dates, determining the yield of said operation from the result of the set of individual operations.

e) Contracted Operation: Agreed operation that has been confirmed by the parties, or by the user referred to in article 38 (Non-user counterparties of a recording system) of this Regulation, and under conditions of being communicated to the clearing and settlement system as a transfer order.

f) Users: Value intermediaries acting on their own account and for clients, and other institutional investors, acting exclusively on their own account, who must register their operations in a securities transaction recording system, in accordance with what is provided by articles 294 and 296 of the Law.

TITLE II

ON THE OTC MARKET

SINGLE CHAPTER

On Buy and Sell Operations of Securities in the OTC Market

Article 4. Non-discrimination among non-professional investors. The prices of contracted buy and sell operations with fixed income instruments by a value intermediary in the OTC market during the day of the operation, shall be equal for all non-professional investor clients of the intermediary. Consequently, value intermediaries may not offer differentiated buy and sell conditions according to client in said class of instruments in the OTC market.

Paragraph I. The operations referred to in this article are those of cash purchase or sale, not related to structured operations.

Paragraph II. It will not be understood that they infringe the provision of price equality those contracted buy and sell operations whose prices differ by up to one percent (1%).

Paragraph III. The Superintendence may determine the non-application of this article when the day of the operation presents unusual volatility at the level of the negotiated instrument or at the market level.

TITLE III

ON ADMINISTRATORS OF SECURITIES TRANSACTION RECORDING SYSTEMS

CHAPTER I.

General Provisions

Article 5. Nature of the service. The recording of securities transactions is a service that administrators of securities transaction recording systems offer to Users, in compliance with article 296 of the Law, and must be executed in adherence to the principles of efficiency, equity, and transparency for the market.

Article 6. Affiliation to a recording system. To operate as Users, they must affiliate to a securities transaction recording system, contracting the provision of the service with at least one administrator of securities transaction recording systems.

Article 7. Tariffs. The system administrators must, if applicable, establish a tariff manual with a clear description of the tariffs of their services, including their policies on any available discount.

Paragraph I. Tariffs may be established based on the following concepts: a) For affiliation in the system; b) For the recording of securities transactions; c) For information when required by a third party to offer it for commercial purposes to their own clients or users.

Paragraph II. Administrators of securities transaction recording systems may not charge for the information published as established in article 47 (Public Disclosure) of this Regulation, nor impose access restrictions to it, except in the case established in paragraph I, literal c) of this article.

Paragraph III. The types of tariffs may be fixed or variable based on a price applicable to each operation performed or service unit contracted, and may not in any case distinguish according to the type, nature, or nationality of the participant.

Paragraph IV. The quality of shareholder of the system administrator shall not influence the design of the tariff structure.

Article 8. Tariff study. Administrators of securities transaction recording systems must back the tariff structure to be applied for the services provided through a tariff study which must be sent to the Superintendence as confidential information.

Paragraph I. The tariff study must be updated at least every five (5) years. In case an update occurs on the occasion of a generalized adjustment of the tariff structure or due to the incorporation of new services, said period shall be considered from the date of receipt of the latter update.

Paragraph II. The update of the tariff study, which backs tariff changes, must be available to the Superintendence prior to the modification of the tariff manual.

Paragraph III. The Superintendence may make observations to the tariff study in the supervision and inspection process.

Article 9. Content of the Study. The tariff study must contain the following information: a) Characteristics of the administering company with specification of the business developed, as well as the market structure under which the assumptions for the projections of its demand and relevant costs will be established; b) Definition and characteristics of the services to be evaluated and of each of the services object of the study, description of its mode of functioning and the specific market to which it is oriented; c) Definition of the model used to quantify demand and its projections; d) Explanation of the model used to perform demand projections, the underlying assumptions, and the sources of information used, taking into consideration the predefined planning horizons, which must estimate the average and marginal costs that are pertinent. Said horizon shall not be less than five (5) years; e) Determination of the cost of capital rate. Identification of a required rate of return on the investment project, which considers the risk factors inherent to the industry in which it operates and the predefined planning horizons. Entities may use the model they deem most appropriate to their reality, leaving established the necessary parameters for its calculation and the assumptions under which it was constructed; f) Definition of the initial investment level and its valuation. Identification and quantification of each of the investments that were or are necessary to put the productive structure into operation, indicating its objective in relation to the services provided; as well as the reinvestment requirements necessary to maintain or increase its capacities, based on projected demand, including depreciation and obsolescence assumptions that are pertinent; g) Determination of the cost structure. Identification and quantification of the costs necessary for the provision of each of the services or groups of predefined services, within the planning horizons. For those costs of a joint nature, the criteria or methodologies of allocation must be explained. Using the projected demand scenarios and predefined planning horizons, a structure of average and marginal costs must be presented for each service or categories thereof; and h) Determination of the tariff structure and adjustment mechanisms. Detail of the tariffs applicable to each service explaining the calculation methodology for each case. Additionally, an analysis of total revenues, historical (if applicable) and projected, for each service or category of services must be incorporated.

Article 10. Administration of a recording system by the Superintendence. When the Superintendence administers a recording system, under the circumstances established in article 293 of the Law, Chapters II, IV, and V of this Title shall be applicable to it, insofar as pertinent.

CHAPTER II

On the Obligations of Administrators of Recording Systems

Section I.

On the Authorization for Registration in the Registry and to Begin Operations

Article 11. Administrators of securities transaction recording systems. The following may function as administrators of securities transaction recording systems: administering societies of centralized negotiation mechanisms, centralized securities depositories, and central counterparty entities.

Article 12. Application. The legal person interested in operating as an administering society of securities transaction recording systems must obtain authorization from the National Securities Market Council to register in the Securities Market Registry, processing the corresponding application via the Superintendent of the Securities Market, through its operational departments, accompanying the documents required in article 14 of this Regulation.

Paragraph I. The authorization process will develop in two (2) phases. a. First phase: Corresponds to the presentation of the application and the documents required in article 14 (Requirements for authorization and registration) of this Regulation, and concludes with a non-objection granted by the National Securities Market Council to begin the second phase. b. Second phase: Consists in the total implementation of the schedule referred to in numeral 4 of article 14 (Requirements for authorization and registration) of this Regulation."