Circular Letter CVM/SMI 08/2020: Offering of Electronic Counterparty Search Systems by Intermediaries

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Circular Letter No. 8/2020-CVM/SMI
São Paulo, December 01, 2020.
To
Directors responsible for compliance with standards and supervision of internal procedures and controls, as provided in CVM Instruction No. 505, of September 27, 2011.
Subject: Offering of electronic counterparty search systems by members of the securities distribution system ("intermediaries").
Dear Sirs,

1. In view of inquiries received regarding the subject matter of this heading, this
   circular letter aims to present the understanding of this Superintendence of Market and Intermediary Relations (SMI) regarding the implementation by intermediaries of electronic counterparty search systems. These systems are intended to search for clients interested in carrying out purchase or sale operations of securities, which can be registered in the modality of “direct offerings” in centralized and multilateral trading systems, maintained by the administrators of organized markets.

2. Initially, it is necessary to clarify that, in light of the definitions provided by
   CVM Instruction No. 461/2007, especially in its articles 3 and 65, the competitive interaction of offers with the intent to carry out operations with securities can occur only in trading systems maintained by market administrators whose operation has been authorized by the Circular Letter 1 (1149965) SEI 19957.008365/2020-63 / pg. 1

Security and Exchange Commission of Brazil (CVM).

3. With this initial clarification, in order to provide a satisfactory
   protection regime for clients, as well as to comply with current regulations, these systems and the rules and procedures of the responsible intermediary must be equipped with the following characteristics:
   a) their use must be justified only in cases of express requests from the intermediary's own clients for the search for counterparties, made for each operation, which must necessarily (i) involve offers with size greater than the minimum quantity established in the rules of the respective administrator entity, as well as (ii) cannot be immediately met by the trading environment, under the conditions set by the client; b) in addition to the previous point, the operation of the system must comply with the standards issued by market administrator entities; in the specific case of B3, it is important to clarify that the discipline of Title II, Chapter III, item 4.3.3 (“direct offering”), contained in the Operational Procedures Manual of that entity, is not exempted, which continues to apply, in its entirety, to offerings resulting from the use of the system; c) the use of the system must be restricted to clients previously registered with the intermediary, both for sending and receiving requests; d) the existence and necessary disclosure of written rules for the operation and use of the system, available on the brokerage's website, with the corresponding period of its validity, including references regarding the minimum size of offers for receiving proposals; e) the action for each request, in order to guarantee that each counterparty request is answered individually and that, in case of fulfillment, other client manifestations regarding the same operation are discarded; f) responses to requests must not have a defined price, but rather indicate mere acceptance of the proposed condition; g) any conflicts of interest arising from the administration of the system must receive adequate treatment, necessarily being included in the intermediary's rules, procedures, and internal controls, as required by art. 31 of CVM Instruction No. 505/2011, especially when the intermediary itself or persons linked to it are involved in the operations; h) the system's operating rule must provide for the method of determining the price, in a way that benefits both parties to the transaction, with the necessary division of the spread (in the case of “open spreads”). For the cases of “closed spread,” the transaction must be divided into two equal operations to be registered at the prices of the best buy and sell offers present in the order book.

4. The observance of the characteristics listed above aims to ensure that the electronic counterparty search system maintained by the intermediary does not promote the competitive interaction of offers, a functionality that is exclusive to the centralized and multilateral systems of the administrators of organized markets.

Circular Letter 1 (1149965) SEI 19957.008365/2020-63 / pg. 2

5. Finally, in addition to the aspects mentioned above, the SMI reiterates that:
   a) the simultaneous alteration of prices available in the order book, by any of the parties involved in the use of the system, may characterize practices prohibited by CVM Instruction No. 8/1979; b) the intermediary's action must be guided by the duties provided for in CVM Instruction No. 505/2011, especially the need to act with good faith, diligence, and loyalty towards its clients, with the privilege of its own interests to the detriment of clients being prohibited; c) the implementation of such systems is conditioned on the publication, by the administrators of organized markets, of a rule with new limits for carrying out direct transactions by asset, in line with the provision in item 3.a (i) above; d) the application of all provisions contained in External Communication 001/2020-VOP/BSM, of October 8, 2020 (“Clarifications on trading of securities outside the markets administered by B3”) remains in effect; e) the search for counterparties through voice channels and other forms of contact by the intermediary's operators continues to be admitted, without the use of automation for the processes of sending and fulfilling requests, or for registering direct offerings, in the manner usually used.

6. The inspection of the observance of the above-mentioned provisions by the intermediaries must be included in the work programs of the self-regulatory entity, which must also issue complementary standards and guidelines.

Sincerely,
Document electronically signed by Francisco José Bastos Santos, Superintendent, on 12/01/2020, at 17:50, based on art. 6, § 1, of Decree No. 8.539, of October 8, 2015.
The authenticity of the document can be verified on the site https://sei.cvm.gov.br/conferir_autenticidade, by informing the verifier code 1149965 and the CRC code 0295C076.
This document's authenticity can be verified by accessing https://sei.cvm.gov.br/conferir_autenticidade, and typing the "Código Verificador" 1149965 and the "Código CRC" 0295C076.
Reference: Process No. 19957.008365/2020-63 SEI Document No. 1149965 Circular Letter 1 (1149965) SEI 19957.008365/2020-63 / pg. 3