Explanatory Note to CVM Instruction 77

EXPLANATORY NOTE TO CVM INSTRUCTION NO. 77/88.
Ref.: CVM INSTRUCTION NO. 77, of May 11, 1988, which provides for futures markets.
The principles and foundations that guided the issuance of CVM INSTRUCTION NO. 77/88 were widely discussed with the Stock Exchanges and CNBV, with the aim of improving existing rules regarding futures markets.
One of the principles that the Instruction sought to preserve and even strengthen was that of self-regulation, delimiting only the specific competencies of the Stock Exchanges and clarifying which decisions require prior manifestation of the regulatory body.
In this sense, with the objective of improving the control mechanisms for concentration in futures markets, it was established that Exchanges must constitute a committee whose responsibilities are, basically, to prevent and correct processes that may put at risk the regular and orderly functioning of the market. In the performance of their functions, the Stock Exchanges' control committees will establish limits on investor participation in futures markets, with the intent to prevent the possibility of acquiring dominant positions. Such a procedure constitutes common practice in foreign futures markets and has been adopted with good results by the Rio de Janeiro Stock Exchange. Thus, it is up to the Exchanges to define their own criteria for setting limits, using those they deem adequate to address the risk/liquidity binomial. It must be considered, in this regard, that market liquidity depends, among other factors, on the degree of reliability of the investing public. This confidence, in turn, derives from the quality and seriousness of the rules adopted by the bodies responsible for supervising the market and ensuring its regular functioning. Regarding § 2 of article 2 of the Instruction, which prohibits the reduction of limits for ongoing operations, we clarify that such a norm refers only to changes in already established limits, not preventing the adoption of deconcentration measures provided for in the Regulations, including the reduction of positions. The same principle applies when the configuration of a group is detected after the opening of positions. The pre-fixation of limits allows the Exchanges to order the elimination of excess positions without exposing themselves to contestations by investors, who would have previously been aware of the imposed rules. Occasionally, emergency situations may justify the adoption of special measures (art. 3 of CVM INSTRUCTION NO. 77/88). In this case, the decision will be taken by the Board of Directors and submitted for CVM review. Thus, public interest and investor protection are safeguarded whenever abnormal situations arise requiring measures not contemplated in the Exchanges' regulations. Regarding operational limit controls for distributors and investment banks, we consider it relevant to clarify that the provision contained in article 7, subjecting these intermediaries to the operational limit imposed in article 7 of CVM INSTRUCTION NO. 36/84, does not imply supervision by the Exchanges regarding compliance with said limit, an obligation that belongs to the regulatory body. On the other hand, article 5 of CVM INSTRUCTION NO. 77/88 aims exclusively to control the degree of concentration, which can hardly be detected without such intermediaries being willing to provide information on who their clients are and their positions. The rule is intended for the intermediary, who must be responsible for providing the information. Such measures offer Stock Exchanges instruments to verify and curb any
concentration processes that affect the regular and orderly functioning of futures markets. It is intended, in this way, to continue the process of modernization and maturation of the capital market. Original signed by ARNOLD WALD President