Explanatory Note to CVM Resolution No. 404 of February 13, 2004

EXPLANATORY NOTE TO CVM RESOLUTION NO. 404, OF FEBRUARY 13, 2004.
Ref.: CVM RESOLUTION NO. 404, of February 13, 2004, which provides for the simplified registration procedure and standards for clauses and conditions that must be adopted in the deeds of issuance of debentures intended for trading in a special segment of a stock exchange or organized over-the-counter market entities.

CVM Resolution No. 404 aims to establish bases for the development, in the country, of a dynamic market for fixed-income securities issued by publicly-held companies.

A market with such characteristics can assist issuing companies in reducing their vulnerability to fluctuations in international markets, insofar as they can obtain the long-term resources they need in the domestic capital market.

A basic requirement for this objective is the existence of a security and a market that, due to simplicity and uniformity, allow economic agents to dispense with complex contractual interpretations and sophisticated calculations for trading.

In this approach, the Resolution is guided by the following strategies:
I - The adoption of debentures whose deeds observe a standard of clauses and conditions that are easy to understand and assimilate (Art. 2, item I and Annexes I to V of the Resolution); II - The improvement of trading systems and market transparency for debentures (Art. 2, item II and Art. 6), essential for increasing the liquidity of these securities, and III - The reduction of issuance and distribution costs for these debentures, either by adopting the simplified registration procedure at the CVM (Arts. 3 and 4) or by the possibility of placing batches over 24 months (Art. 5).

From items I and II resulted the set of conditions that was deemed appropriate to call "Standardized Debentures."
From item III resulted specific and faster registration procedures and distribution periods for these securities, without prejudice to the quality of information, as advocated by CVM Resolution No. 400, of December 29, 2003.

ON THE STANDARDIZATION OF CLAUSES AND CONDITIONS

EXPLANATORY NOTE TO CVM RESOLUTION NO. 404, OF FEBRUARY 13, 2004.
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Without limiting the creativity and diversity of conditions of other debenture issuances, the CVM understood that establishing a deed model could represent an important step for the development of the private fixed-income securities market.
The standardization of clauses will substantially reduce the time period that investors and intermediaries previously had to dedicate to reading and understanding deeds before each transaction, often requiring the assistance of specialists.
General familiarity with this standardized contract will enable transactions in the secondary market with attention focused on financial return versus the credit risk of the issuing company.

ON THE DEVELOPMENT OF THE MARKET
The expansion of liquidity levels requires absolute market transparency, with unrestricted disclosure of prices, volumes, and quantities of transactions executed, prices and volumes of offerings, and other pertinent information. For this reason, standardized debentures must be registered for trading exclusively in stock exchanges or organized over-the-counter markets, which also meet the requirements established in Article 6 of the Resolution.

This transparency requirement aligns the interests of the investor and the issuer, who now have security in the price formation process. For the issuer, it is of special importance, as treasury buy and sell transactions can facilitate and reduce the cost of managing their cash flows.

Still in the mutual interest of issuers and investors, the role of market makers was established (Art. 2, item IV), with the objective of having a permanent indicative value for the execution of transactions with standardized debentures.

ON PRACTICES FOR EFFICIENT PRICE FORMATION
In the pursuit of efficiency in price formation, the Resolution imposes that the primary distribution of standardized debentures take place in a stock exchange or organized over-the-counter market entity and that the price reflect any premium or discount over the value of the debt of the issuing company (Art. 6 of the Resolution and item 3.9 of the deed model).

On the other hand, the extension of the validity of the registration for primary distribution of standardized debentures in an unrestricted number of auctions in the chosen trading system (Art. 5) over 24 months – auctions announced with only one day's notice – will allow the issuer to manage placements more conveniently, aiming to obtain the best cost for its debt.

To ensure correct price formation and give potential uniform treatment to debenture holders, "buy" and "sell" treasury transactions by the issuer must also be transparent, which is why the deed prohibits issuers from privately trading the standardized debentures they issued (Deed Model – Annex I – Clause IV, item 4.1.1).

ON THE QUOTATION SYSTEM
To allow for immediate comparison of risk and return perceptions between different issuances and/or issuers by investors and market operators, the Resolution stipulates that standardized debentures must be traded in a system that allows quotation as a percentage of the principal value. In this way, the interest value to be paid periodically – the "coupon" – must be added to the settlement value of the transaction (Art. 6, item II). The international practice of quoting by the so-called "clean price" is thus imposed.

On Special Registration Procedures at the CVM
With a view to the speed of approval of registration requests, the CVM relies on the participation of stock exchanges and organized over-the-counter market entities (Art. 3). These institutions, legally classified as auxiliary bodies of the Securities and Exchange Commission, are already tasked with supervising their respective members and securities transactions conducted therein (art. 17, § 1, Law 6.385/76).

Due to this collaboration, the CVM reduced the period for analysis and granting of distribution registration to five days (Art. 4).

This special treatment, however, cannot be requested by all publicly-held companies, but only by those that have used the market in the five-year period prior to issuance (Sole Paragraph of Art. 3), since the information from these companies meets the most current requirements of investors and has been subject to full examination by the CVM. Issuances of standardized debentures by other publicly-held companies will observe the analysis periods established in CVM Resolution No. 400/03.

ON THE OTHER CHARACTERISTICS AND CONDITIONS OF STANDARDIZED DEBENTURES Among the various characteristics and conditions contained in the deed model, the following should be commented on:

1. The exclusive use of debentures of the subordinated or non-preferred species – as they allow for an increase in the volume issued and, consequently, liquidity, and reflect the credit risk of the issuer rather than that of a specific guarantee.

Given that within the same species there is no order of precedence for payment, these debentures allow for different series issued at different times to be traded under the same code, provided they have the same financial condition and maturity date. In this way, a security for a specific maturity, which achieves good liquidity in the market, can have its volume efficiently increased through the offering of other series or new issuances.

2 - On Early Maturity – In addition to current clauses for early maturity due to bankruptcy, judicial reorganization, financial and contractual defaults, the insertion of other conditions, linked to other contractual obligations of the issuers, especially those related to cross-default of financial contracts, is admitted. Due to the diversity of individual situations, the CVM concluded by leaving the administration of these specific situations open to agents.

However, the model establishes a quorum of eighty-five percent of the securities in circulation for the revision of early maturity of standardized debentures.

3 – Quorum for Alteration of Yields and Maturity Dates – The liquidity and credibility sought for standardized debentures require the immutability of the contracted financial conditions. That is, the investor's financial application must be fully and individually honored by the issuer. Consequently, unanimity is necessary to alter the characteristics of the yields, with no possibility of adopting the usual renegotiation clause in which dissenting holders have their debentures acquired by the issuer. Nothing prevents, however, that in circumstances of default or extraordinary events, transactions between the parties may occur, but with the settlement of the debentures.

Finally, it is worth clarifying: (i) that there are no restrictions on the issuance of "Standardized Debentures" by any publicly-held companies, always requiring the obtaining of public distribution registrations at the CVM and for trading in the specific environment of a stock exchange or organized over-the-counter market; and (ii) that the adoption of the deed model is free in other debenture issuances.

Signed Original
LUIZ ANTONIO DE SAMPAIO CAMPOS
Acting President