CVM Explanatory Note 17/80

CVM EXPLANATORY NOTE NO. 17/80.
Ref.: Taxation of operations relating to Securities and Financial Instruments governed by CMN Resolution No. 610 of 18.04.80.

CVM has been seeking, through successive initiatives, to promote the development of the securities market and equip it with an adequate regulatory base, aiming to consolidate a reliable market capable of fulfilling its greater purpose of supplying the funds necessary for the formation of large private national enterprises.

It is in the primary market that companies raise the resources necessary for their growth. Without an active secondary market, however, where buyers and sellers of previously issued securities can meet, the development of the primary market is compromised, as the risks of equity investment increase significantly. This is the fundamental function of the secondary market: to provide liquidity to previously issued securities, allowing the exchange of positions between investors and indirectly stimulating activity in the primary market.

CVM views Stock Exchanges primarily as centers generating liquidity, which is why it will seek to discourage operations that contradict the classic principles of investor conduct in a risk market. With the introduction of the futures market, operations have increased in which the risk assumed by participants is null, resulting in the inadequate use of the securities market, with the trading floor being used as a mere mechanism to ratify what characterizes credit operations.

In these "financing operations for futures or forwards," lenders and borrowers apply or obtain resources at pre-fixed rates, carrying out simultaneous spot and futures or forward operations, with the former having no real intention of holding and the latter having no intention of disposing of the securities backing them, aiming only to receive or pay a certain amount for the volume of resources they lend or borrow.

Typically, the lender simultaneously carries out two operations, a spot purchase and a futures or forward sale, of lots of shares of the same characteristics. However, it does not intend to maintain its investment, but rather to effectively dispose of the acquired lot upon the contract's maturity. The differential obtained between the spot purchase price and the futures or forward sale price constitutes a previously contracted gain, which differs in no way from gains obtained in a fixed-income operation. That individual who seeks to finance themselves through a similar mechanism, by disposing of securities, carries out simultaneous spot sale and futures or forward purchase operations, raising the resources they need and, knowing the price difference on the date they carry out these operations, is using the equity market as a mechanism to obtain short-term credit at previously defined rates.

This is not the vocation of the secondary securities market, and CVM does not consider the practice of these financing operations to be healthy. The application of IOF on such operations aims to discourage their execution. Its application is restricted to the typical cases mentioned above, known as "matched" operations, where purchase and sale are carried out on the same trading day, through simultaneous orders.

Although an exhaustive enumeration of the possible variations these financing operations may present was not sought, restricting the rule to typical cases, its spirit is perfectly clear. CVM trusts in the exercise of the social responsibilities of self-regulators and intermediaries in the securities market so that the measure achieves its full effectiveness, increasing the costs of financing operations and thus discouraging their practice.

Parallel to this, the Commission has been developing studies aimed at improving the mechanisms of the futures market, implemented by the pioneering initiative of the Rio de Janeiro Stock Exchange. These studies have been developed jointly with the Rio and São Paulo Stock Exchanges and aim to incorporate adjustments naturally resulting from the empirical observation of a new instrument, in search of the common goal of endowing it with higher levels of efficiency, safety, and reliability.

CVM views with satisfaction the strength of our stock market and believes that the futures market, once certain practices that disfigure it as a true risk market are removed, could become an important instrument for broadening the equity base, which should be built through the increasing participation of investors in national companies controlled by private capital.

RIO DE JANEIRO, APRIL 23, 1980.
Signed original by
JORGE HILÁRIO GOUVÊA VIEIRA
President