Brazil: Is Trading Permitted During Public Offers In Brazil?

Last Updated: 30 April 2013
Article by Walter Stuber

The Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) decided to amend and add provisions to CVM Instruction No. 400, of December 29, 2003 (CVM Instr. 400/2003), that regulates public offers for the distribution of securities in the primary and secondary markets in Brazil, by means of CVM Instruction No. 533, of April 24, 2013 (CVM Inst. 533/2013).

As a general rule, trading with securities issued by the issuing company (emissora) or the issuer (ofertante) is prohibited during a public offer in Brazil, except in the cases expressly listed in item II of article 48 of CVM Instr. 400/2003, as subsequently amended by CVM Instruction No. 482, of April 5, 2010. This restriction was imposed by CVM because the corporate brokers would have knowledge of a range of detailed information from the issuing company not publicly disclosed and therefore they should refrain from trading with the securities of the company during the course of the offer1.

Pursuant to the provisions of item II of article 48 of CVM Instr. 400/2003, as amended, up to the publication date of the Distribution Closure Notice (Anúncio de Encerramento de Distribuição) with securities of the same issuer and of the same kind of the public offer referenced therein, either convertible (conversíveis) or exchangeable (permutáveis), or with securities in which the security object of the offer is convertible or exchangeable, the issuing company, the issuer, the corporate brokers (instituições intermediárias), the latter since the signing of the contract, involved in any finalized or projected public offer distribution, and the people working them or advising them in any way, shall abstain from negotiating with these securities, except in the case of: (a) execution of stabilization plan duly approved by CVM; (b) total or partial disposal of securities lot that is the object of firm commitment; (c) negotiation for account and order of third parties; (d) operations clearly meant for accompanying a share index, certificate or receipt of securities; (e) operations to protect positions taken in total return swaps contracted with third parties2; (f) operations carried out as market maker; or (g) discretionary management of third-party portfolio.

Since the enactment of CVM Instr. 400/2003, several situations have occurred that induced CVM to consider the need to increase the list of transactions that the corporate brokers can perform with securities of an issuing company, during the offer period, in order to allow operations that do not pose significant risk to the regular functioning of the market.

For example, on September 9, 2010, during the period of the public offer distribution of shares issued by Petróleo Brasileiro S.A. (Petrobras), the CVM Board ruled that the corporate brokers of the offer would not be prevented from negotiating Petrobras stock or securities referenced in it, in the following cases: (i) purchase of shares or American Depositary Receipt (ADR) of Petrobras in the market to fulfill contractual obligations previously assumed, such as those arising from loans or to deliver shares arising from the anticipated exercise of purchase options by clients; (ii) purchase or sale of shares or ADR, so as to maintain the strategy risk exposure in Petrobras options volatility; and (iii) purchase or sale of investment funds index (Exchange Traded Fund - ETF) that had the shares issued by Petrobras as part of its assets.

CVM Instr. 533/2013 modified item II of article 48, introducing new exceptions to the general rule to reflect the evolution of the institutions and of the Brazilian market3. One of the major changes is that the trading prohibition was limited to securities of the same kind of that object from the public offering, in which such securities are referenced, convertible or exchangeable, or to securities in which they are convertible or exchangeable. Furthermore, the following new transactions have been now authorized: (i) operations to protect positions in all types of derivative, and not just in total return swaps4; (ii) negotiation within the framework of the activity of market makers in Brazil or abroad5; (iii) acquisition and subsequent sale of lots of securities, as requested by the clients so that the corporate brokers can provide stock liquidity to these clients (client facilitation)6; (iv) operations arising out of arbitrage strategies between securities and its certificates of deposit or between market index and futures contract referenced in such securities7; and (v) operations to comply with obligations assumed before the beginning of the restriction period arising out of: (a) loans of securities; (b) the exercise of purchase and sale options by third parties8; or (c) fixed-term purchase and sale contracts9.

To allow the control of the operations carried out in the context of exceptions to the rule of prohibition to trading, corporate brokers, their subsidiaries, controllers and companies under the same control that operate in the financial markets should draw up a report with all the operations described in item II of article 48 of the CVM Instr. 400/2003, with the modifications introduced by CVM Instr. 533/2013.

This report shall be prepared within up to seven business days counted as of the date of publication of Distribution Closure Notice10 and must contain the following information: (i) the security, with its kind and class, if applicable; (ii) the market in which the operation was contracted and settled; (iii) the date of the operation; (iv) the type of transaction (purchase or sale); (v) if the operation was performed in the portfolio of the corporate brokers, their subsidiaries, controllers and companies under the same control or if it was held in a third party's portfolio; (vi) the modality of operation, which must fit into one of the exceptions provided for in CVM Instr. 533/2013; (vii) the quantity of traded securities; and (viii) the unit value by which the security was traded.


1 The criticism of the very broad restriction imposed by CVM through item II of article 48 intensified after the edition of CVM Instruction No. 476, of January 16, 2009 (CVM Instr. 476/2009), which deals with public offerings of securities with restricted efforts. CVM Instr. 476/2009 raised substantially the offering of debt securities of companies. For example, the debentures prevented the normal course of negotiations with shares of the issuing company.

2 The total return swap is a kind of derivative. In such transactions the institution assumes an exposure before a third party, with the obligation for example of transferring to that third party the value increase and the results of a particular position of a certain asset. The hedge of that exposure will be done from the assumption of positions in such asset.

3 The new regulatory text is in line with Regulation M, § 242,101, (a), of the U.S. market which prohibits intermediaries public offers, which cannot negotiate, with a few exceptions, securities of the same kind of that object of the offer, or referenced therein.

4 This change is justified by the need of financial institutions to manage their risk positions taken in other derivatives, and not just in total return swaps. This is because these operations not only are designated by different denominations in other institutions but they also do not exhaust the list of possibilities available in the market. The hedge of positions taken in derivatives does not represent significant risk to the regular functioning of the capital market, because it does not allow for the manipulation of prices or use of privileged information. It is only a operation that seeks to exclude any risk of the financial institution in relation to the price variation of the referenced asset in the derivative contract in which the financial institution is one of the contracting parties.

5 The market maker activity should be treated similarly, whether practiced in Brazil or abroad, provided that it is duly regulated and supervised in the foreign jurisdiction.

6 Such operations are exclusively requested by clients and no induction by the corporate brokers is allowed. The operation of client facilitation occurs as follows: (i) certain investor owns a lot of relatively large securities to be sold quickly but for which there is no sufficient liquidity; (ii) the investor seeks an institution of the system of distribution of securities, which proposes a particular price for the lot of securities, with the price adjusted according to the size of the lot and the liquidity of such security; (iii) the institution of the system of distribution of securities acquires the lot of securities and on the basis of its assessment, and by its own risk and account sells the securities acquired from client in one or in several stages.

7 Arbitrage is usually considered a strategy without risk and that confers on the arbitrator an immediate profit as a result of an inaccurate pricing of the traded assets and of the natural trend to correct this inaccuracy. It can occur with the buying and selling of the same asset on different markets or even with the trading of related assets, as it is the case of arbitrage between cash stock index and the future contract of the same index. Is an important operation for the capital market, since it corrects any existing inefficiencies. Due to the recognition of the importance of arbitrage strategies and the fact that they do not represent the taken of any directional position by the corporate broker, CVM decided to include this financial operation in the list of permitted exceptions. To reduce the legal uncertainty regarding the concept of arbitrage adopted, only two types of arbitrage were allowed. None of the allowed types involve any exposure to market risk by the corporate broker.

8 For the settlement of loans of securities and for the fulfillment of an obligation arising from the exercise by a third party of financial options, the corporate broker must negotiate the securities object of the contract, by means of the purchase or sale of such securities. This way, if the institution were prevented from trading certain security, but were forced to do so because of the maturity of the securities loan, for example, affected institution would be under default and undermine the counterparty in the loan or the guarantor of their settlement. Depending on the borrowed amount or the number of exercised options, the default could mean a relative systemic risk for the financial market. For this reason, CVM included this exception in the list of allowed operations.

9 The fixed-term contract is a commitment to buy or sell an asset for a certain price in a future date. Upon expiration of the contract, on the maturity date one of the parties (the purchaser) shall buy the asset at a price determined at the beginning of the contract and the other party (the seller) must sell it in the same terms and conditions. Therefore, there is an obligation to negotiate the security and in the case of the debtor, the creditor will be harmed.

10 This report as well as all the supporting documentation must be kept for a period of 5 years or more, if so determined by the CVM, in case of an administrative process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Walter Stuber
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