Securities Analysis & Portfolio Management Assignment On Brazilian Securities

Submitted to: Prof. Prashant Sepani

Submitted By: Swati Gupta

Brazilian Securities
History
After World war ll, Brazil faced a ruinous inflation, a rapid non-directional growth of industry, and the absence of an effective capital market to further its national and international interests. Inflation fed the boom in the postwar years. It was the unregistered underwriter of the economy. The mechanisms evolved for the control of inflation and the emergence of a capital market plan produced a need for a stock exchange system. The work proposes to bring into historical perspective the 185 years between the loose organization of a rudimentary trading exchange and the Bolsa de Valores, the Brazilian Stock Exchange, of 1975. The development of the market took place in stages directly related to regulatory acts on the part of the government. Generally, this has been the history of the evolution of all the security exchanges. The establishment of Brazils capital market parallels the turbulent history of the country itself and presents many innovations which might be applied to the economics of the developing countries of the world.

Brazilian Capital Market

Intermediation System
The distribution and intermediation system of the Brazilian capital market is made up of 566 institutions, of which 227 are brokerage firms dealing in securities, 316 are distributors, 17 are categorized as investment banks and six can be described as development banks. Another three companies are responsible for custody and registration of operations. Bearer shares are not authorized in Brazil and almost all other transactions are registered, a method which demands a high level of operational sophistication from the companies looking after their custody. All trades on the stock exchanges are made through brokers; that is, even financial institutions must use brokerage services. The commissions levied in Brazil are fixed at competitive rates and all negotiations are performed in the name of the end client.

Stock Exchanges
There are nine different stock exchanges operating throughout Brazil. They are:

The So Paulo Stock Exchange - BOVESPA

The Rio de Janeiro Stock Exchange - BVRJ The Far South Stock Exchange - BVES The Bahia - Sergipe - Alagoas Stock Exchange - BVBSA The Minas Gerais - Esprito Santo - Brasilia Stock Exchange - BOVMESB The Paran Stock Exchange - BVPR The Pernambuco - Paraba Stock Exchange - BVPP The Regional Stock Exchange - BVRg; and The Santos Stock Exchange - BVSt

Of these nine exchanges, BOVESPA is responsible for the greatest part (85%) of the trades made in the country. The remaining eight exchanges are integrated within the SENN - Electronic System for National Negotiation - and account for around 15% of the total volume. By December, 1995, there was a total of 874 public corporations registered with the Securities Commission, of which 578 with shares quoted on the stock exchanges, representing a total market valuation of US$ 147.6 billion. The average volume of shares negotiated on a daily basis in Brazil was, in December of 1995, US$ 234.2 million on the sight market and US$ 47.6 million on the futures and options markets. The level of concentration in the Brazilian shares market is high. Also in December, 1995, the 10 most actively traded shares on the BOVESPA were responsible for 83.1% of the total volume negotiated, while at Rio de Janeiro the 10 most active after shares represented 79.8% of the total.

Regulatory Structure
The regulatory system for the Brazilian market is made up of five main agencies: the National Monetary Council (CMN), the Technical Commission on Currency and Credit (COMOC), the Brazilian Central Bank (BACEN), the Securities Commission (CVM) and the Superintendence for Private Insurance (SUSEP). Each one performs one or more of the following functions: standardization, regulation, oversight and consultations regarding activities of the Brazilian financial system. The self-regulating bodies play a similar role and are represented for the most part by the stock and commodities exchanges. The financial system regulating instruments are, in order of decreasing importance: the Brazilian Constitution, the Federal Laws, Resolutions of the CMN, Directives, Circulars and Deliberations of the regulatory organs and the Statutes and Resolutions of the self-regulating entities. The Brazilian regulatory system follows the so-called Mixed Regulation model, in which the government delegates to the self-regulating entities part of the tasks of oversight and orientation of its members transactions.

Principal Laws and Regulations of the Capital Market

The Brazilian capital market is regulated by the CMN and disciplined by the CVM, BACEN and SUSEP. The BACEN regulates all financial institutions, SUSEP has a disciplinary role in the private insurance sector, while the CVM regulates institutions that are active in the securities market. The main laws and regulations applicable to the Brazilian capital market, set out in chronological order, are as follows:

Law No. 4,595 of 31/12/64 - Set up the present structure of the financial system and its principal regulatory agencies - the National Monetary Council and the Brazilian Central Bank. Law No. 6,385 of 07/12/76 - Set up the Securities Commission, the main oversight agency for the Brazilian capital market. Law No. 6,404 of 15/12/76 - "the Public Companies Act". Establishes the legal framework for public companies. CMN Resolution No.1,190 of 17/09/86 - Deals with the negotiation on Exchanges for Commodities and Futures, subject to approval by the Central Bank or the Securities Commission. CMN Resolution No. 1,289 of 20/03/87 - Approves the regulations of Supplements I, II and III, which control the articles of association and workings of the investment companies - foreign capital and investment funds - foreign capital and bond portfolios and securities, respectively. CMN Resolution N o. 1,645 of 06/10/89 - Deals with the standards for scrutiny of the Commodities and Futures Exchanges, subject to the approval and intervention by the Central Bank and the Securities Commission. CMN Resolution N o. 1,655 of 26/10/89 - Regulates the articles of association, organization and workings of brokerage firms dealing with securities. CMN Resolution N o. 1,656 of 26/10/89 - Regulates the constitution, organization and workings of the stock exchanges. CMN Resolution No. 1,832 of 31/05/91 - Approves the regulations in Supplement IV to Regulation 1,289 governing the constitution and administration of securities portfolios held by institutional investors constituted abroad.

CMN Resolution N o. 1,927 of 18/05/92 - Approves the regulation in Supplement V to Resolution 1,289, which regulates foreign investment through the mechanism of Depositary Receipts. CMN Resolution N o. 2,099 of 17/08/94 -Deals with the conditions for access to the National Financial System, to minimum values of capital and adjusted net assets, to the setting-up of branches and the obligation to maintain adjusted liquid assets at a value compatible with the degree of risk inherent in the active operations of the institutions authorized to act by the Central Bank ("the Basle Accord"). CMN Resolution N o. 2,109 of 20/09/94 - Alters and consolidates the standards which regulate the application of resources of private entities dealing with private insurance schemes and which also operate in Future Markets. CMN Resolution No. 2,138 of 29/12/94 - Deals with authorization to transact swap operations on the over-the-counter market and options on swaps linked to gold, exchange rates, interest rates and price indices as specified by institutions.

Regulation of the Derivatives Market

The market in Brazilian derivatives, formed after the legal structure to regulate financial markets was set up, is regulated, depending on the type of derivative, by three regulatory groups: the Central Bank, the CVM and the self-regulating bodies themselves. Generally speaking, Brazils legal macro-structure has facilitated development of the Brazilian derivatives market. The existence of a regulating structure for the banking system and other financial intermediaries has lent flexibility and dependability to the countrys financial transactions. Regulation of the Brazilian financial system as far as it concerns the derivatives market can be summarized as follows: The Securities Commission

Regulates all activities in the derivatives market concerning securities, such as: options, future options and futures on shares, futures share indices and options on futures share index.

The Central Bank

Regulates all international operations which take place in the derivatives market, since the monitoring of all operations involving foreign currency is its responsibility

Regulates all the country's financial institutions when these touch upon aspects concerning the expansion of the money supply and credit Regulates all financial activities with derivatives which do not fall under the control of the CVM, for example, the over-the-counter market in swaps and the bulk of the contracts negotiated on the exchanges dealing with Commodities and Futures

Stock and Future Exchanges

Regulate all trading activities or in the systems for electronic trade administered by them. The exchanges are self-regulating bodies which are nevertheless, subject to the abovementioned regulatory organs. Various types of derived contracts are negotiated on the Brazilian exchanges.

Regulatory Body - CVM

The CVM was created in 1976 through the Law No. 6,385 with the objective of regulating and disciplining the workings of the Brazilian capital market and, consequently, to fulfil the role of one of the institutions responsible for the process of building up savings and assisting economic development. In this way, by offering investors appropriate security and operational flexibility on the capital market, it contributes towards the process of company capitalization, the dispersion of prosperity and better allocation of productive sector resources. In order achieve objectives; the CVM assumes the following main functions:

Ensure the efficient, reliable and equitable working of the securities market and foment its expansion on these suppositions. Protect investors and securities holders by avoiding or preventing irregularities, frauds and manipulative practices designed to create artificial conditions of demand, supply or price. Ensure the ample and fair disclosure of relevant information concerning securities trades and the companies issuing such paper.

Principles for Regulation: The initiatives to be taken by the CVM in its capacity as a regulating agency are based on a set of principles: public interest, dependability, the search for operational efficiency and proper

allocation in the markets, the preservation of competitiveness, freedom within which the agents can act and, last of all, protection of investors in the capital market. Public interest The country's economic prosperity is regarded as a matter of public interest. Therefore, the mechanisms designed to foster it are seen in this light. In the specific case of the securities market, it is perceived that it should ideally complement the financial system in the task of allocating financial savings to investment. Dependability In order for the market to be able to properly fulfill its allocation function, there has to exist a series of circumstances which will induce participants to believe that the workings of the markets are fair and impersonal. Consequently, the guarantee of correct procedures during each stage of the process of intermediation, custody of securities and the faithful performance of each contract are factors which will attract the investing public and significantly extend the market's reach. Efficiency Operational efficiency can be defined as the ability of a determined market to facilitate the completion of transactions at the lowest possible cost, that is to say with reduced trading costs. Standards of informational efficiency already in place demand that prices for assets negotiated in a given market correctly and simultaneously reflect relevant information about their value. The search for the highest standards of efficiency on both counts is the fundamental goal which drives regulation, since they can make the movement of resources by savers to available investment opportunities more efficient. Freedom Throughout the process of regulation and the development of the market in securities, it is vital to show a constant respect for the free flow of market forces, unrestricted access to the market and unrestrained activities. For this to take place, mechanisms which foster the freedom to act of all agents during each phase of the negotiation process are considered as being in the public interest. Competitiveness It is through competitive practices that the highest standards of efficiency are attainable. The dissemination of the number of investors and intermediaries and regulation geared towards

combating improper practices are constant mechanisms in the quest to improve conditions and, at the same time, promote competitiveness.

Regulation and Self-Regulation

The securities and futures exchanges are defined as self-regulating bodies and this status has been guaranteed to them by CMN Resolutions No. 1,645/89, which concerns future exchanges, and CMN No. 1,656/89, which relates to stock exchanges. These Resolutions accord to the exchanges responsibilities over the regulation and inspection of transactions carried out on their floors and electronic negotiation systems, for the arbitration of disputes which may arise and for the installation of mechanisms to prevent and set right infractions of legal provisions, deviations from pre-assumed conditions for equity and fair play in the markets and protection afforded to investors. Turning to the financial dependability of the market, it should be pointed out that the exchanges are obliged to maintain Guarantee Funds to safeguard the settlement of operations and protect against the risks of default. The CVM Directive No. 220/94 represented an enormous stride towards self-regulation by determining that the stock exchanges should lay down and verify the fulfillment of rules which govern the conduct of brokers and their relations with investors and the market.

Organizational Structure of the CVM

The head office of the Securities Commission is located in Rio de Janeiro and is administered by a President and four Directors nominated by the President of the Republic. The President and the Directorate together make up the Collegiate, which draws up policies and lays down practices to be introduced and followed by the corps of Superintendents, the executive branch of the CVM. The General Superintendent observes and co-ordinates the executive activities of the Commission and is assisted by the other Superintendents and Managers who are subordinate, and by the staff. Their work is specifically geared towards activities concerning companies, financial intermediaries, investors, external inspection, accounting and audit practices, legal matters, market development and internationalization, computing and administration. The Head of the Cabinet lends direct support to the Collegiate, who can also count on receiving the support of the Advisory Committee on Communications, the Economics Advisory Committee and Internal Audit. The executive structure of the CVM is completed by the Regional Superintendence at So Paulo and Brasilia.

Functions and Powers of the CVM

ensure the efficient, smooth and just workings of the market for securities and foment its expansion based on these criteria furnish protection to holders of securities and investors while avoiding and preventing irregularities, frauds and manipulative practices deigned to create artificial conditions of supply, demand and price ensure the proper disclosure of relevant facts concerning securities and the companies issuing them stimulate savings and long-term investments

- register and inspect companies which issue shares traded on the stock exchange and the overthe-counter markets - supervise the activities and services in the securities market, in addition to the information concerning it, the parties who participate and the securities traded. - advise the National Monetary Council in fixing maximum price limits, commissions, emoluments and other benefits charged by intermediaries - accredit independent auditors, consultants and analysts working with securities

authorize the activities of portfolio management and custody authorize the distribution of securities throughout the market

Imposing Penalties
The CVM's oversight work includes the identification of irregular practices and the immediate adoption of punitive measures, identifying instances in which the law or other regulations have been infringed, carrying out inspection of the institutions involved and, if necessary, initiating an administrative inquiry. Currently, this procedure has shown to be laborious and protracted. Depending on the outcome of the administrative inquiries, one of the following penalties may be imposed on the party responsible for the breach:

a warning a fine the administrator of the public company or entity may be suspended from performing duties in the shares distribution system declaration of unfitness for the exercise of the duties mentioned above suspension of authorization or from the register

disfranchisement from authorization or being struck off the register

The Securities Commission has striven to accelerate the process by which inquiries which still have not been brought to a conclusion are examined and adjudged. Such initiatives produced a significant increase in the number of rulings and punishments imposed in 1995. The legal apparatus in place guarantees to the CVM and to the stock exchanges the power to single out the investors responsible for the orders passed on to the brokers. This identification is performed on a daily basis as a routine part of business at the exchanges. The CVM may demand to know, in addition to routine information, the identification of the investors at any given moment. The specification of principals is a powerful aid for the purpose of inspection, enabling the identification and verification of irregular practices. It further allows the separate accounts of the brokers to be distinguished from those of the investors. With the objective of fortifying the CVM's inspection capacity, various modifications to the laws governing the financial market have been discussed, and some of the most salient are:

dispensing with bank confidentiality in special circumstances strengthening the penalties available Introduction of a "compromise agreement", that is reducing the penalties for implicated parties who agree to collaborate in the inquiries.

Bibliography:
www.mzweb.com www.cvm.gov www.bfre.com www.wikinvest.com www.bmfbovespa.com