On September 17, 2015 the Brazilian Securities and Exchange Commission ("CVM") enacted CVM Rule No. 568 ("Rule 568") that, among other changes, modifies CVM Rule No. 358 dated January 3, 2002. This is a very important rule especially for institutions that trade in large positions in Brazil through cash settled swaps.
There are several changes that may affect investors' reporting obligations, but the most critical one is that market participants are now required to report any acquisition or disposal of derivatives (including cash settled derivatives) that exceeds (either upward or downward) the thresholds of 5%, 10%, 15% (and so on and so forth) ("Rule 358 Threshold") of any type or class of shares issued by publicly held companies.
With regard to derivative transactions, Rule 568 also provides that:
i. shares and physically settled derivatives shall be aggregated for purposes of verifying whether a Rule 358 Threshold was reached;
ii. cash settled derivatives shall not be aggregated with shares and physically settled derivatives for purposes of verifying whether a Rule 358 Threshold was reached;
iii. If an investor holds at the same time a short and a long derivative, such positions may not be netted out for purposes of verifying whether a Rule 358 Threshold was reached; and
iv. once a Rule 358 Threshold is reached (either with respect to (i) shares and physically settled derivatives, or (ii) cash-settled derivatives), the investor is required to disclose all of its holdings (both of (i) shares and physically settled derivatives and (ii) cash settled derivatives).
Pursuant to our reading of Rule 568, institutions that now hold cash settled derivatives would not be required to report their position until they perform a (buying or selling) trade that would cause them to reach a Rule 358 Threshold.
We are fully available to provide any further clarification on this matter.
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.